Taking Stock 26 January 2023

FUND managers in 2023 will increasingly turn to investing in unlisted companies, as discussed in last week’s Taking Stock.

Investing in private equity broadens the options and avoids the transparency required of investing in listed securities.

Unlisted securities are valued by opinion, rather than by very visible daily sales on an exchange, and this can shield fund managers from inspection. Indeed, such valuations by definition are speculative.

Expect such investments to become a trend in 2023 when there will be fear of markets that might re-price listed securities harshly should the central banks prove to be right about the time needed to overcome wild consumerism.

Another trend will be a new emphasis on moneylending by fund managers.

This trend is highly visible in the USA as the more risk-averse bankers step back from corporate lending, especially the lending that funds the riskier area of funding, leveraged buyouts. This withdrawal creates an opening.

The major fund managers in the USA are now lending billions in this area, the largest of loans that I have noticed being a $6 billion sum to fund a buyout.

In NZ the concept of fund managers believing that they have the data and experience to be smarter lenders than the banks is a concept aimed at higher short-term returns, rather than driven by prudent risk management.

I do not refer simply to the goofy headline-chasing behaviour of KiwiSaver funds which confuse the obligation to focus on risk/return with the marketing goal of being applauded by politicians and the headlines in our gullible media.

Some will recall how those oafish practices led to 1.5% mortgage lending by organisations with clearly no capacity to understand the imminence of interest rate changes.

Some cruelly call this ''peacock lending'', rather than sound investing based on long-term results.

In 2023 investors can expect to hear, at least for a short while, about KiwiSaver managers funding social programmes at low rates. Social housing might be an example.

But this type of confusion, with inexperienced fund managers, is not what represents the greatest risk.

Peacock lending generally unfairly limits return but need not imply more risk of capital loss.

The risk of capital loss will emerge when peacocks get into corporate lending, believing they can gain higher returns while managing the risk of capital loss.

Imagine the fund managers who wanted the high returns offered by Elon Musk, when he structured borrowings to buy Twitter.

The banks involved are now funding those loans which are not able to be on-sold, even at 85c in the dollar, meaning capital loss is both inevitable and extreme, far exceeding a mere billion dollars.

In the NZ context, fund managers may find themselves offered glittering fees to sub-underwrite the loans that are not easily on-sold to banks.

The likes of Milford may have the data to select what it underwrites wisely, but there are many privately-owned KiwiSaver funds that display very little evidence of banking skills.

Nor is it likely that fund managers will seek high return/high risk loans just on the corporate market.

The evidence overseas suggests our shallower operators will be invited to invest in credit card debt, student loans, perhaps even payday loans, where returns can be sold at rates above 20%, but where capital loss, at least at a modest level, might be inevitable.

For years, decades in fact, trading banks have charged those who borrow cash from credit cards interest rates of at least 18%. The justification for the silly rate was the acceptance that 8% of such lending is likely to fail, still leaving a tidy nett margin for the lender.

Accordingly, most wise, seasoned citizens decline to use such a source of credit, musing that as they would NEVER default, they are disinclined to fund the defaults of others, as is structured by the rates.

Indeed, it has amazed me that the likes of Heartland has not pursued a high-limit, no-risk form of card lending by using its excellent database to identify no-risk borrowers and offer them a low-rate line of unsecured credit, accessible on demand.

Indeed, they could secure the loan with such instruments as an agreement to mortgage unencumbered property, if they wished.

Banks have access to such detailed knowledge of the financial behaviour of every client that the failure to extract subsets and assess the acceptable returns for no-risk lending seems negligent.

If we had any non-bank KiwiSaver fund managers with real skill and an ability to apply sound banking principles, then this type of lending might be done well.

Of course, such lending is not liquid – cannot be sold on a daily market – so would need to be limited in lending volume to a low percentage of an asset portfolio.

The selling point would be the convenience and instant response of a cash demand.

Readers should never underestimate the value of that convenience, even to extremely wealthy people.

How well I recall one of New Zealand’s richest men telling me of how the late Allan Hubbard lent him a million at 10%, repayable in a few weeks, on the basis of a phone call, the money transferred that day. The borrower did not want his bank to see what use he had for the money so happily paid 10%, without a ''facility fee'' or a ''draw-down fee'' and indeed, given it was Hubbard who lent, without any paperwork other than a handwritten, signed, four-sentence letter. I accept that is an extreme example.

In 2023, fund managers would be under no pressure if the US traders were correct in their current prediction that interest rates would decline in 2023, inflation would reverse quickly, and asset prices would again accelerate, to the relief of every fund manager.

However, if the central banks, with the opposite viewpoint, prove to be right, then fund managers would need to find avenues to achieve the high short-term returns that win them mandates and power up their bonuses.

So two trends seem certain – more investing by fund managers in private equities, and more involvement in high-yielding bank-like lending.

A third trend might be more investing in venture capital or even angel lending.

The skill sets required for that type of use of other people’s money are daunting but mandates must be won, and short-term returns must fuel the sort of bonus commitments that attract the small pool of ''star performers'' that differentiate those whose focus on the short term.

For the sake of trusting investors, let us hope the central banks are wrong in their forecasting of inflation and interest rates.

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AS a wicket keeper/batsman for the NZ cricket team, Adam Parore was not top shelf, not to be compared with the likes of BJ Watling or Tom Latham, but neither was he ''bottom'' drawer.

What distinguished him was his pursuit of wealth and his ambition to develop his own brand in an era dominated by the likes of Chris Cairns.

After cricket, Parore had a desire to march into sharebroking, a choice rather more improbable than, say, selling real estate. Then, like Mike Pero, he used the media to ramp up a career in mortgage-broking. His attention span moved on. He kept up his public profile by climbing mountains.

But the slipperiest slope he has just tackled has been to set up a platform to enable cryptocurrencies to be traded in NZ, the data protected by the use of a crypto-platform he has had developed over the past year, perhaps similar to a nominee company overseen by a trust company.

Of course, during the past year, cryptocurrency investing has changed. If we cannot say it has fallen from its perch, the reason we cannot say that might be that it never reached a ''perch'', on which wise creatures aspired to rest.

Furthermore, the failure of FTX in the US, when it was fouling the nest on it perch, has made Parore’s ambition somewhat more fraught, through no fault of his own, rather through poor timing.

Perhaps Parore could adapt his platform so that it could secrete other alternatives, like diamonds or artwork, even non-fungible tokens.

Undoubtedly there would be retail investors who would invest for higher returns in speculative assets that in a good year might enjoy value increases.

Cryptocurrencies might have had their day under the sun lamp but a good platform, supported by world-class anti-theft devices, might have an alternative use.

Parore is clearly ambitious. The crypto idea might be a fizzer but I do not expect it to be his last foray into ventures aimed at attracting those who believe in his ''brand'' as a wicket-keeper batsman from 20 years ago.

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INVESTORS in real assets like gold do not necessarily need a platform to hold their assets.

Gold investors can buy physical gold and hold it themselves or deposit it in bank safety vaults; they can buy gold and have it held by Perth Mint; they can buy listed shares in gold producers, perhaps enjoying dividends.

And at the riskiest end, they can invest in prospecting companies, of which there are dozens in Australia.

Next riskiest in status are gold explorers who have found gold and are spending money seeking to quantify the amount of resource they have found.

In NZ, we have an Australian public-listed company, Oceania Gold, which mines gold at Waihi and at Macraes (near Oamaru) and can produce dividends.

Oceania produces around 75,000 ounces per year at Waihi and is pressing to gain consent to extend its underground mines beneath conservation land, leaving the most modest of visual pollution, tiny derricks little bigger than a fence post.

Oceania produces nearer 120,000 ounces per year from its giant open-pit mine at Macraes, enjoying a find that releases around one gram per tonne of rock mined (a tonne is around 40% of a cubic metre).

Gold is a major contributor to NZ, our second or third largest export to Australia (where the Perth Mint buys our gold).

Local investors’ other listed choice is the Australian-listed miner, Santana, which explored successfully in the area around what 150 years ago was named the Bendigo Reef.

Santana today believes it has discovered mineralised rock in the area of that reef that might yield Two to three times the gold of the profitable Macraes mine.

Within a month or two it expects to receive the results of infill drilling, a process that reduces the possibility of its current drilling results being mathematically anomalous.

If an explorer drills holes every 150 metres and finds similar yields, the explorer is entitled to claim an ‘’inferred’’ result, the inference being that the rock between the drilled holes will yield the same levels of gold as the rock in the drilled holes.

If the explorer returns to that area and infill drills holes every 30 metres, finding the same yields, the mathematical certainty of the find is much greater, and has a much greater value.

The Santana results are due out in the first quarter of this year. Also due then is a new, independent measurement of the inferred quantum.

If the infill drilling shows that the drilled holes were ''flukes'' and just happened to find the best spots, then Santana’s ambitions will at best be deferred.

Obviously, if the infill results confirm the high yields, then Santana could be presiding over New Zealand’s most valuable find.

From a tiny, confined area on private land, Santana would have a resource from which it would aspire to extract gold at levels much higher than Oceania or Macraes have achieved in a country with a history of successful gold mining, going back to the days in the 19th century when NZ had its own gold rush.

People living around Bendigo need no reminding that around 140 years ago, the Lady Ranfurly dredge produced 12,000 ounces of gold in one day from the junction of the Clyde and Kawarau rivers. That yield was a world record at the time. Bendigo itself housed hundreds of successful gold miners.

Santana will today tell you that the old-timers, with a shovel and a pick, sought the rock that Santana today has found and hopes will be the centre of its aspirations. The old-timers came within a cricket pitch in distance of finding the ore-bearing rock that Santana has discovered in 2021/22. They were so close to what seems a ''jewellery box''.

Santana’s next round of assayed results will be of great interest to the several hundred NZ investors who control nearly half of the Australian company.

Disclosure: I hold shares in Santana (SMI.ASX).

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CHINA has been behind the sustained rise of the gold price, having used its central bank to buy 62 tonnes of gold in the past few months.

It has little interest in fiat currencies.

The world produces around 2,000 tonnes of gold a year, much of which is used in jewellery, or in electronics. The rest is used as a storage of wealth by countries like China, Russia, much of Europe and North America.

Santana would be aspiring to mine around 4-7 tonnes a year if its exploration indications become a reality.

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New bond issues

We have learnt of two new bond issues in the pipeline, one from ANZ Bank, and the other from China Construction Bank.

Both banks have a strong credit rating and have a low risk of default.

We are expecting ANZ Bank to offer a 5-year senior bond, with an interest rate likely between 5.00% - 5.25%.

China Construction Bank will likely offer a 3-year bond, with a variable interest rate (likely to be above 5.00%). The interest rate will be altered regularly and will increase if interest rate swaps increase.

Investors interested to learn more about these offers are welcome to contact us to be pencilled in on our lists, pending confirmation of rates and terms.

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David will be in Whanganui on Thursday February 2 and in New Plymouth on Friday February 3.

Chris will be in Hamilton on Tuesday February 21, at the Ventura Inn & Suites boardroom, 23 Clarence Street, and in Christchurch on February 14 and 15, at the Airport Gateway Motel.

Edward will be in Wellington on Friday 10 February, in Nelson on Friday 17 February, and in Napier 22 (Mission Estate) and 23 of February (Crown Hotel).

Johnny will be visiting Christchurch on March 22, seeing clients at the Russley Golf Club.

Clients are welcome to contact us to arrange an appointment.

Chris Lee

Chris Lee & Partners Ltd

Taking Stock 19 January 2023

AT A time when fund managers and experienced financial advisers are leaning heavily towards the bond market and bank term deposits, the risk of a bank liquidity crisis is dramatically reduced.

Simultaneously, central banks pretty much anywhere are requiring of banks that they increase their capital and reduce their lending risk, especially in the property market.

Accordingly, it seems fair to assume the risk of a bank failure caused by loan defaults and write-offs is much reduced from just three years ago. The real threat to mortgage collection is unemployment. Currently we have more jobs available than willing workers.

The monitoring and supervising of banks in the western world is more process-driven than ever, and has greatly reduced risk of liquidity or loan default-based failure.

The days when the great American fraudster Bernie Madoff could complete a regulator's audit with a one-minute phone call have long gone. (The regulator instructed to ''have a look'' at Madoff's fabricated dealings rang him. She knew him. ''Are your practices ok?'' she asked. “Of course,” he replied. Inspection finished.)

You might conclude that the risks of a major bank failing, especially in NZ, are much lower than in earlier years, despite high levels of mortgage lending.

Yet here we have our Finance Minister, Grant Robertson, preparing us for a new version of the 2008 deposit guarantee scheme that was so badly designed by Michael Cullen, Treasury and the Reserve Bank (in 24 hours) and so dreadfully overseen by the National Government (Key, English), Treasury and the Reserve bank, during a period of financial chicanery.

Robertson's proposal to introduce a new deposit guarantee scheme in 2024 might be somewhat presumptuous, given the shelf life of star dust, but he has been working towards this idea for three years, and would implement it if he were given the chance by the voters this year.

The guarantee scheme would cover depositors in banks, credit unions, building societies and finance companies.

He is now trying to work out how to charge for the guarantee so that it might be self-funding, and thus might avoid the multi-billion-dollar bonfire of public money that resulted from the 2008 guarantee, fuelled by the indifference of Key and Treasury to taxpayers' money (“chump change”).

Robertson will need to find an accepted formula for pricing the guarantee to reflect the risk to the taxpayers who would underwrite his scheme, if it were ever introduced.

The 2008 scheme charged the banks the thick end of a billion dollars, which in effect partly underwrote those finance companies which had survived until the deposit guarantee scheme arrived. The public underwrote the rest, thanks largely to political incompetence.

The finance companies paid for barely a few percent of the quantum of money that was ultimately paid out to their depositors.

This time, the cost of funding the scheme must surely be equitable.

Banks are the monsters in our deposit taking world. A bank failure would be the equivalent of a Guy Fawkes event so a fellow like Robertson, with no financial market experience or acumen, might be tempted to levy the banks heavily.

Building societies rarely have sufficient lending risk to threaten financial stability and perform little lending that is poorly secured.

Credit Unions are tiny. Their disappearance would not be noticed by many. They rank as a pie cart in an era of McDonalds and KFCs.

The real issue will be how to ensure finance companies are levied to meet the full cost of their failure, should failure occur.

Currently we have one serious finance company that is critical to our system. That is UDC, once proudly a public-listed company, later a subsidiary of the ANZ bank, now sold, and overseas-owned.

It does not accept retail deposits. Systemic risk from UDC is virtually nil.

There are a couple of Australian finance companies which do seek funding. Their disappearance would matter not a tuppenny lollipop to the country, so long as they continue to be of ''pie cart'' significance.

We do have a few tiny finance companies chasing (forlornly, I hope) retail money, one being General Capital, run by Brent King, previously a manager of Dorchester Pacific. If it failed, a thousand investors might lose some or even most of their money, but surely they factor that into their thinking when they choose to accept returns that barely exceed the returns of much stronger-listed investments, including bank subordinated debt.

Robertson is now canvassing opinion on how to provide a guarantee for all these disparate players in the deposit-taking market.

He has not often appeared to be an astute listener, if one judges his other efforts to impose ideas on the financial markets.

The banks want him to charge for the guarantee on the basis of credit rating. That makes sense and would make even more sense if credit raters have learned from their errors of 2008 and now are astute in their ratings.

The banks would want to offer two deposit rates for each term, one not guaranteed, the other government underwritten (to $100,000 per customer, per bank).

The unguaranteed deposit rate might be 20 basis points higher.

The lower, guaranteed, deposit rate would create a 20-point saving for the bank which it would hand on to the government to pay for the guarantee.

The probability of bank failure being so low would mean the Crown would likely collect a ''guarantee fee'' which over time would build a multi-billion dollar fund.

The cynic in me says that at some future time, that fund would be assessed as excessive, and some of it would disappear into a general fund for government use. The words ''slush fund'' come to mind.

So the banks are not the problem.

Indeed you could argue that Robertson is primarily looking for a solution to a problem that can be detected only by the most sensitive of bugles. Is he introducing a guarantee because some focus group suggests it would be a vote winner?

As the credit unions, building societies and finance companies are of a combined size that is barely relevant, there should be thought given to excluding them from taxpayer guarantees. Their failure would not topple the banks. Disclosure and education might be the handbrake on the growth of these market participants.

Currently they do not have a guarantee and bumble along at the risk of the depositors. If those parties are settled, why introduce a guarantee?

If Robertson insists that there might be political gain in introducing a guarantee for the minnows, then surely those operators should pay all the relevant costs.

Probably none of those operators have a credit rating, so the formula for charging for the guarantee would be problematical.

Might a better solution be for those players to be instructed to buy an insurance bond that would underwrite losses?

A private sector organisation offering such a bond would very quickly assess the true risk and would provide a bond at a cost reflecting individual risk.

There would be no taxpayer risk if a fully monitored insurer was selling a properly priced, individualised guarantee.

The banks would simply be collecting a levy that ultimately was just another of Robertson's hidden taxes (like his redundancy insurance concept). If the building societies, credit unions and finance companies are now irrelevant to the stability of our financial markets, then from all my musings you might conclude that a government guarantee is a silly idea, and simply another bureaucratic intervention with no commercial logic.

In summary, let the building societies, credit unions and piffling finance companies find their own solutions aimed at their customers' confidence. They are not of a scale that threatens the system.

Why should the banks or the taxpayers foot the bill for their potential failure? Is there some problem with the current Open Bank Resolution which would address problems?

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IF Cullen were still alive, he would have every right to explain why he was convinced to introduce a guarantee system, designed in a hectic 24-hour period without any consultation with experienced private sector sages.

His explanation would be that without the guarantee, the Australians, who had just unilaterally announced a guarantee, stood to benefit from NZ money cascading into guaranteed Australian bank accounts.

There can be no argument with this justification, in respect of bank deposits. Of course an immediate withdrawal from the roughly ten billion held then in finance companies was not possible; finance companies did not hold significant sums of call money that was in danger of recall. Money could be recalled only on maturity of the term.

Perhaps the justification for including finance companies was that the guarantee greatly reduced the chance of investors clogging up the courts (and maybe prisons) by suing Treasury, the Companies Office, the Securities Commission, multiple audit firms, five trust companies, a wide range of directors including former cabinet ministers, and credit rating agencies, which had allowed dreadful finance company practices to be hidden.

So frenzied had been the growth in global demand for non-bank term investments that the duties of virtually everyone paid to validate the non-bank sector had been performed appallingly.

The public had been cheated. At the very least, the Securities Commission should have been sued.

In NZ, the information provided to well-meaning analysts proved to be as phony as Trump's tax returns.

Accounting standards were dreadful; auditor practices were childish, many accounting firms heavily conflicted.

Trust companies had employed the equivalent of hillbillies to authenticate finance company transactions, virtually none of the staff even vaguely familiar with the companies' practices.

Regulators, with rare exceptions, were complicit in ignoring blatantly untrue promotional stuff. (''All our loans are insured.'')

Directors lied. (''We do not get involved in capitalised interest lending.'')

Treasury contrived to avoid any accountability. (''We have no responsibility for South Canterbury Finance.'')

Cabinet Ministers ignored whistleblowers. I had personal experience of this.

The Companies Office allowed its dreadful mistakes to be hidden, despite catastrophic consequences.

Clear evidence of categorical lies by company executives ultimately led to mild reprimands, virtually none of the worst offenders made accountable.

In this context Cullen's guarantee was a cleansing process, using taxpayer money of around $2.5 billion (nett), by my calculations, to offset investor losses, and to avoid a never-ending sequence of legal disputes.

Of course no politician would concede such a motive. Such a revelation would win very few votes.

This time Robertson's guarantee has none of that ''cover-up'' appearance. There are still many areas that require remedial attention but we have now so little public money at risk that the remedies seem uncommercial in their design.

In my book The Billion Dollar Bonfire, I spelt out a baker's dozen of changes that had to be made to effect the remedies.

To the credit of the Financial Markets Authority, most of those changes have been either made, or are being made.

By the time NZ rebuilds its non-bank deposit taking sector to a meaningful size, all of the changes are likely to have been made.

I hope so. Using banks and taxpayers to subsidise backstreet operators is a thought process that has no intellectual or commercial origin.

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THE imminent round of salary increases for our distinctly average politicians (with less than a handful of exceptions) will no doubt outrage most voters. The Higher Salaries Commission has signalled increases are on their way.

I am reminded of one of my favourite people who sadly died at around 90 some years ago. He KNEW that good people do not serve just for dollar rewards, and produce best results because they have pride in their contribution.

Fitzy (Pat Fitzgerald) was a manual worker, bright, dignified, hard-working, and a fix-it man. His salary would never have far exceeded $20,000 a year. He lived for a long while in Wainuiomata, Lower Hutt, a low-decile area with very few decent facilities when he lived there.

He decided the area needed a swimming pool facility and one of such a high standard that it would lift the morale of the community. Personally, he visited local people, and formed a voluntary work force, all committed to Sunday labour. He arranged to borrow equipment, and to have material donated.

The only ''pay'' was that on Sunday nights there would be kegs of ale (donated) and a barbeque (food donated). After some years, Fitzy, as the unpaid Chief Executive, and his band of volunteers, completed a fine facility and Fitzy, coyly, with an ''aw, shucks'' expression, was sitting beside the Governor General who opened the pool.

Said Fitzy: ''To get something done you need good people. Volunteers. People who do things for the right reason. People who take pride in getting things done well. The last thing you need is to pay people – all that does is attract the wrong people.''

One wonders if the Higher Salaries Commission ever met Fitzy.

Muldoon was paid a smidgeon over $13,000 per annum at a time when junior teachers were paid $3,700.

Backbenchers, such as Aaron Gilmour was, will soon be paid $180,000 a year, not counting their perks. Cabinet Ministers will be paid more than $300,000. Ardern will collect $500,000.

I am not sure any swimming pools get built these days, unless you count as swimming pools the giant potholes on our highways.

Politicians are more likely to close down swimming pools to ''save money'', to over-pay half-baked politicians.

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I will be in Christchurch on January 24 and 25, though am fully booked. I still have a few times available in Ashburton on the afternoon of 25 January and in Timaru on 26 January.


I will be in Hamilton to see clients on Tuesday, February 21, venue to be advised.

I will be in Christchurch on February 14 and 15, at the Airport Gateway Motel.

My dates for my next Auckland visit will be confirmed next week.

David Colman will be in Palmerston North on Wednesday 25 January and in Lower Hutt on Thursday 26 January.

Edward will be in Nelson on 17 February, and Napier 22 and 23 of February.

Johnny will be visiting Christchurch on March 22, seeing clients at the Russley Golf Club.

Clients are welcome to contact us to arrange an appointment.

Chris Lee

Chris Lee & Partners Ltd

Taking Stock 12 January 2023

FROM the newspaper headlines of ''Record Boxing Day Sale'' one could draw several quite different conclusions.

The media would prompt the obvious thought, comforting its readers that, as always, heavily advertised sales create consumption at ever greater levels. The media love that narrative.

One imagines the Reserve Bank Governor might be wishing that his ''cool your jets'' advice had been expressed more threateningly.

Another inference might be that in preparation for a year (era?) of austerity, canny consumers will await big discount days and make essential purchases only on those days.

Such a conclusion would be paying deep and maybe exaggerated respect for the clinical, sane behaviour of those who like to (or have to) shop.

A further thought might be that consumers now accept that the outcome of rapidly-rising wages, commodity price increases, supply chain fractures, and labour shortages must be continually rising prices – inflation, supply driven.

The logical response would be to buy today because prices would be higher tomorrow.

But the scariest inference is that a vast number of our population continue to make poor spending choices, falling for the headlines of ''cheap'', continuing to consume today, disregarding the certainty that inflation might sabotage the budgets of households, which understandably would then require ever more state support.

My guess is that the RB governor will read of all this profligacy and be even more determined to penetrate the heads of consumers with even larger increases in his weapon of choice, the Overnight Cash Rate, rates higher, for longer.

RB Governor Adrian Orr has made it absolutely clear that he will take action to shrink disposable income until he sees consumer demand falling.

The Boxing Day record sales, I surmise, will harden his resolve.

The credible independent economist Cameron Bagrie (ex ANZ Chief Economist) warns that a recession will result from Orr's plan and will be felt most in late 2023 and 2024.

He warns that resulting from higher interest rates will be household and corporate stress, leading to rising unemployment which itself inevitably leads to loan defaults, forced house sales, and greater social dysfunction.

The Boxing Day exuberance will have supported his fear that many New Zealanders have forgotten how long it takes to squash inflation.

From all this wearying, bleak forecasting, investors must make their own inferences.

Higher interest rates might be a blessing for fixed-interest investors but must impact corporate profitability and thus dividends.

Asset values fall as interest rates rise. Investors in the property trusts and retirement villages will be well aware of that, following share price slumps in those sectors in 2022.

Other than ongoing rises in the cost of debt, aimed at turning off consumption, what could break this plan?

Cooling the jets, as Orr implores, means cutting consumer spending in unnecessary areas.

The Warehouse in December reported disappointingly lower sales between November and December 2022 (a 5.5% decrease), as the demographics that shops in The Warehouse stores either listened to Orr, or had less in the purse to spend, or had chopped up their credit cards.

Yet Air New Zealand reports excessive demand; is there another demographic that thinks it is immune from belt-tightening?

Might petrol (in volume), used cars, real estate, and takeaway food be the sales figures to watch, alongside credit cards and retail sales?

The RB and the likes of Bagrie have set an agenda that all investors should accept as the basis for their decision-making in 2023.

To balance their gloomy forecasts, one has to have some hope that a change in attitude towards dumb consumption might be great for the planet! Boxing Day record sales trumpeted no good news and might in some cases be regarded as an IQ failure for much of our population.

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IF I had to make New Year guesses, my list would be different from Bagrie's.

I suspect there will be no recession, only the most modest rise in unemployment, and little change in consumerism.

My expectation is that a load of pretend wealth (crypto, property price fairy dust, derivatives, NFTs) will reverse, leaving behind repayable debt.

I expect mortgage interest rates to be uncomfortable for longer.

And I expect political ideology to be shifted sidewise or reversed, including the higher tax measures Robertson planned to fund a poorly- conceived redundancy tax.

I expect KiwiSaver investors to rue the sales-driven, cynical advice to embrace risk, as though somehow the outcome of unprecedented, conflating threats is predictable.

I expect the Bank of Mum and Dad will be in growth mode.

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THE implausible argument that investors should treat market gyration as ''cyclical'' may please those who are most comfortable with the salesmen's refrain that ''we have seen it all before, just ride it out''.

That line fits uncomfortably with the experienced market participants for whom I have respect.

We most certainly have not seen it all before. Markets are not subject to any patterns or any rules that outline the future of prices or value. The future will not look anything like the past.

Even if one ignores the unpredictability of realities like inequality, sea warming, changes in atmospheric gas levels, major weather events, over-population, impossibly-high debt levels and war-mongering, one must still acknowledge that temporal changes are giving the future a shape that must impact how we consume, and what value we place on our assets.

For example, is it not possible, even probable, that the concept of maximising dividends will be challenged by the changing views of younger voters, who see redistribution of wealth as the solution, rather than creation of new wealth?

Might more of the future corporate surpluses be handed to workers, or even to the Government and other social partners, rather than to those whose capital created the success?

Another imminent change might be the consequence of breakthroughs in technology making radical changes to the way we live as, for example, occurred after the internet and the cellphone arrived.

Will the yellow pages return when the ''cycle'' rotates? Landlines? Telegrams?

A compelling case about the speed and the effect of such change might be posed by the recent dramatic take-up of a new technology provider by ChatGPT, a service enabled by artificial intelligence. It aspires to be a better version of Google.

ChatGPT translates unstructured thoughts into commercial written communications. For example, a builder’s verbal agreement can instantly be converted into a competent, enforceable contract by this new app.

How relevant is ChatGPT? How rapidly might it bring about change? Consider these figures:

When Netflix evolved, it took 3.5 years to attract a million users.  Airbnb reached a million in two years. Facebook hit seven figures in 10 months. Zoom, aided by Covid, attracted a million users in 5 months. Instagram reached the magic number in 2.5 months. ChatGPT? Five days.

In an era of such rapid change, the argument that we are in a predictable ''cycle'' seems fatuous, an expression aimed at sales rather than sane risk management.

I was reminded recently of just how quickly young people are absorbing change, and now consider issues that 63 years ago would have been well outside my own horizon.

For Christmas I bought book vouchers for some of my granddaughters and took one of them to Paper Plus, leaving her to select her own reading.

She visited various sections of the shop and returned with several books, the most expensive of which was titled How to Build Your Own Business. That granddaughter is aged nine!

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THE speed of change is usually determined by breakthroughs in technology and by temporal changes, often initiated by political decisions.

I expect these two regular influences will be the drivers of two likely changes in coming years.

Banking technologies are leading us to a cashless society, though the Reserve Bank argues that the use of banknotes is not falling dramatically.

I sense that people are driving change. In the past weeks, I have been told ''We do not accept cash'' at a Tank juice bar, at a local bowling club and at a restaurant.

As we move away from cash, the lowlifes who fund themselves by thieving cash will either turn to some other crime or find a new way of accessing other people's money, electronically. Scamming will become an even wider profession, passwords even more threatened.

Data theft, and thus for the rest of us, data protection, seems certain to be a growth industry.

Perhaps Infratil foresaw this trend a few years ago when it bought 47% of the Canberra Data Centre. Infratil now values that investment at some billions more than its entry price, though that value is not exactly a measurement established by unconditional purchase offers.

Personal physical security is also of growing concern. In New Zealand our politicians have allowed our law enforcement and judiciary to remodel, leading to the non-investigation of many crimes, and to the ''discounting'' of sentences on the rare occasions criminals are put in front of a judge. Older people, in particular, will not be enjoying this trend.

The local response from citizens will be to make crime harder.

Will we see communities that cannot be entered, or exited, except by electronic cards? Will closed-circuit television increasingly be linked to private security firms as a response to the changes in crime prevention law?

Might data protection and property protection become lucrative, high-margin areas priced to be assessable only by the moneyed? Might the Mafia concept of paid protection infiltrate NZ?

Insurance premiums seem certain to further influence the use of security.

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ANOTHER area of change that seems inevitable might be the growing preference of fund managers to invest in unlisted companies, as Infratil did with CDC.

In New Zealand this might be in part because of the relatively small number of companies willing to endure the growing compliance constraints of a listed company. It is easier to sell to a private company than to a listed company required to put aside time and money to cope with public transparency requirements.

Fund managers will want to invest in a greater range of unlisted companies.

A cynic might add that investments in companies whose share price value is not transparent have a certain attraction for fund managers.

To display quarterly and annual valuations the fund manager owning unlisted securities must use a ''valuer'' whose model produces a guess as to value.

As we are seeing in Silicon Valley now, the implied ''value'' of many unlisted companies often has about as much substance as fairy dust.

Yet the valuations are displayed, and fund manager bonuses paid, on these highly variable ''values''.

Many may recall the former Air NZ chief executive who once ran a listed fund whose unit price was determined solely by the estimate of the directors. In effect the directors’ declared price was the midpoint for all trading. That model ended in hardship for the hapless investors, as you would expect.

My guess is that in an era of fund manager losses there will be subtle - actually not that subtle – pressure placed on those who are paid to value securities where there is no transparent, two-way, liquid market.

The most obvious current example of the uncertainty of values is provided by the current wholesale-only round of capital raising required by Sharesies. The market is being asked to accept that Sharesies has a company value not of its previous implied figure of $500 million, as was touted in 2022, but of $300 million.

It is looking to raise around $35 million of cash, presumably to give credibility to its ambition to become yet another KiwiSaver provider.

Interestingly its minor investors, the Kiwisaver Fund Simplicity and the boutique fund manager Pathway, value their shares as though Sharesies was worth more than $400 million.

If the current capital raising succeeds – and that is not certainty - then there will be some write-downs to occur, other people's money in Pathway and Simplicity diminishing.

The American cost-free securities platform Robinhood has been a loud supporter of Sharesies. The American broking platform has itself lost nearly 90 percent of its ''value'' in the past year or so, as the loss-making model loses credibility in a world no longer supplied with free money by central banks. Will it participate in the Sharesies capital raise?

This issue is important not because it will offer an up-to-date picture on a model that drove bull markets when money was virtually free, but because it will shed light on the substance behind ''valuations'' used by fund managers when they report their results and calculate their bonuses.

My opinion remains that fund manager fees and bonuses should not be based on somebody's untested valuation model. If we have to have bonuses let them be based on market transactions, and let the bonuses be unpaid for five years, and thus assessed over a reasonable time, reversible if fairy dust is involved.

Right now in Silicon Valley startup shares once valued at $100 are being sold at nearer half that as jobs are lost, money ceases to be free, and a modicum of wisdom returns to those who might be buyers with real cash, or perhaps cash borrowed to invest.

In tough times some fee-charging companies declaring a ''value'' is likely to be inspected most carefully, being any valuation is accepted.

How do investors avoid being swallowed up by these deceptions?

Read the deed . . .

Refuse to sign up with any fund manager whose trust deed has fine print that favours the manager, potentially at your expense before signing up and handing over money.

Much tighter trust deeds should eventually put an end to loose behaviour.

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Edward Lee will be in Auckland on Wednesday 18 January (Wairau Park), Thursday 19 January (Ellerslie) and Friday 20 January (Auckland CBD).

Edward will be in Nelson on 17 February, and Napier 23 and 24 of February.

I will be in Christchurch on January 24/25 (fully booked), accompanied by our newly-appointed adviser Fraser Hunter, and will be in Ashburton on January 25 (pm) and in Timaru on January 26 (pm).

I will be in Hamilton to see clients on Tuesday, February 21, venue to be advised.

David Colman will be in Palmerston North on Wednesday 25 January and in Lower Hutt on Thursday 26 January.

Johnny will be visiting Tauranga on February 22, seeing clients at the Mt Maunganui Golf Club. He will be visiting Christchurch on March 22, seeing clients at the Russley Golf Club.

Clients are welcome to contact us to arrange an appointment.

Chris Lee

Chris Lee & Partners Ltd

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