Taking Stock 26 July 2018


IMAGINE a small country with a modest economy, usually living beyond the radar of its much bigger neighbours.

Unexpectedly its economy blossoms on the basis of barely controlled immigration, and totally uncontrolled tourism increases.

It has very little sovereign debt, a relatively low level of inequality, excellent social welfare, health and education programmes, its people are literate and highly educated, and its governments of both political sides have been benign.

Could be New Zealand? Could be Malta?

Its economic growth has consistently outperformed its main trading partners. Its unemployment rate is effectively zero, in fact it must import labour to perform the jobs its young people no longer will accept.

Average wages have risen by nearly 50% in the past eight years.

The last sentence, of course, stops the need to guess whether I refer to New Zealand or Malta.

Average wages in New Zealand in the past eight years have risen by far less than 50%.

Malta’s transformation is both impressive and frightening.

It has converted to a knowledge economy, aligned its education offerings to the new world of technology, and abandoned the low value, low wage manufacturing base that characterised Malta for many decades, after World War II.

In that period Malta’s manufacturing industries produced beautiful low-margin lace – tablecloths etc – and ornate low-margin jewellery. It exported fish and a small amount of food, it had a low cost source of oil, thanks to a deal with Libya, which swapped Malta’s right to drill into a giant oil field in its waters, for cheap oil from Libya, which was drilling into the same field from its waters.

Wages were low. Growth was low. Expectations were modest.

Few people travelled extensively, cars and fishing boats were plain, housing was universally modest, Catholicism dominated lifestyles, and tourists accepted an infrastructure that was not First World.

The decision to change all of this began with an emphasis on relevant education, included the joining of the European Union, and now involves selling residential rights to high wealth people, roughly at a cost of a million Euros a person.

Along the way Malta rewrote its tax policies to attract the world’s online gaming centre to Malta, charging tax at 35%, but rebating most of it, in exchange for high wage jobs in the technology sector.

The economy, especially in the past three years, has ‘’gone gangbusters’’, according to the owner of one technology company to whom I have been speaking.

He says that Malta has attracted high value people working in technology, helping Malta to lift its revenues, lift its taxes, and lift its overall wages.

Regrettably, all of this has combined to lift property prices and lift rentals.

Low-cost housing and affordable rentals had helped Malta to keep its lowest earners above any reasonable poverty line.

That may be changing.

Those who buy residential property rights must build, buy, or sign long-term leases, so the problem is not empty houses.

The problem is a shortage of land, a shortage of water, a shortage of landfills to dump building waste, and most of all a shortage of Maltese labourers.

Bringing in the labour builds the numbers who need rental housing.

Exacerbating the problem is Malta’s decision to use its budget surplus to rebuild all of its roads.

In just a few years it will spend hundreds of millions producing road surfaces and road safety services that will cater for its population growth.

Like NZ, Malta drives on the left, but most of its tourists, from Europe, drive on the right. Narrow roads, not divided by barriers, used by drivers not comfortable driving on the left, leads to road accidents and deaths, involving tourists and locals.

Malta aims to divide the roads with barriers.

As its main two islands, Malta and Gozo, are small this programme is achievable. Neither island is much bigger than Lake Taupo.

Water is a problem. There are no rivers in Malta. There is a little bore water. Industry and agriculture exploit it. Bore water levels are falling.

Desalination provides the grey water the island needs. Imported bottled water is the only water consumed.

Energy came from oil, as part of the Libyan 40-year deal that has ended. Today a Chinese system is fuelled by imported Russian natural gas.

Seafood is wonderful but meat is imported. Fruit and vegetables are now world-class but largely imported.

Maltese wine improves each year and remains quaffable but not yet of international standards.

Malta is not really a consumer society yet, but the younger generations are changing Malta to the discomfort of those who loved its languid, Christian, law-abiding lifestyle.

Church attendances now fall each year. Abortion is now legal, so is same-sex marriage, young people are not pursuing parentage, and respect for the Church and the Government is falling.

The newspapers now regularly report the discovery of marijuana plants and other drugs.

Whilst Malta has a low level of serious crime the figures are rising.

The country continues to resist the retirement village concept.

In Malta the ‘’old’’ are described as those who are 90 or more. They prefer to live in their own homes, near their friends, shopping at the tiny grocers and dairies, and at local markets.

A recent newspaper feature article quoted the ‘’old’’ as being unimpressed with the thought of moving.Old slippers are comfortable!

The car fleet is changing as wages increase. Malta is 7th equal with New Zealand for car ownership per head of population. The cars have always been small, most of them imported from Japan, second-hand. Roads are narrow, car parking rules are variable so tiny cars make sense.

However one now sees luxury cars not evident ten years ago.

One cause of change has been the arrival of African refugees, smuggled across from Libya.

On a per head ratio, Malta’s acceptance of refugees has been higher than any country. There is now push-back, as the task of rebuilding the lives of desperate people overwhelms Malta’s facilities.

However I noted that the housekeepers in the complex where we stay are now African young women. Perhaps as the language issue is solved, employment opportunities will arise.

Curiously one unexpected outcome of this rising prosperity has been a rise in political corruption.

The new Labour Government has fuelled economic growth and accommodated rapid change but shortcuts in processes have become apparent.

Various politically powerful people have arranged to focus their trusts in Panama legal circles, with a few domiciling trusts in New Zealand.

The media constantly report that major contracts are being awarded without a tender process.

Today the media is accusing the politicians of allowing the trade unions to intermediate major contracts.

Expediency may be a by-product of rapid growth, if the media’s accusations are fair.

There is no doubt that the people have more money.

Power prices have fallen by 25%, average wages have risen, shortages of skilled staff are chronic, restaurants are full, and some of the languidness is disappearing.

For the first time in the 20-plus years my wife and I have returned here, to her birthplace, we have had to be formal about renting a car.

Malta has introduced demerit points. I had to declare that if the car I hired collects demerit points while I have the keys, then no demerit points should be ascribed to the owner of the car. (It seems car hiring here is like hiring a house, and requires no licence.)

Malta is a great little country - perfect weather, clever caring people, good fun, and clean sea into which its people submerge, every day, it seems. The beaches are free, clean, but very busy.

Its historical relevance will never disappear.

However its senior people are already observing that progress has a price.

I foresee that New Zealanders will soon be humming the same tune.

Because we have so much in common with Malta, we should be engaging with them, learning from what they discover.

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LIKE NZ, Maltahas much gratitude for the contribution to its nation of the British.

Their judicial, police, social welfare, education, health and political processes all were enhanced by Britain.

Accordingly the Maltese feel genuine sadness about the degradation of Britain, now facing an unsolvable problem of exiting the European Union without destroying a working relationship with its greatest and nearest trading partner.

Those Brits with whom I talk now are convinced that the referendum that started this process was a particularly stupid and unnecessary act of democracy.

How to exit Europe dominates Britain’s parliament, to the extent that last year Britain’s new laws were around half of the normal number.

Britain faces this problem but there are other major underlying problems, reflecting past errors.

- The hospitals have not the money to perform standard work. The benchmark required for a surgical procedure has had to be raised, significantly.

- The police are grossly under-funded, 60 per cent of Brits believe that policing is inadequate.

- Wages are still pre-2008 levels, having had no recovery since the global financial crisis.

- Britain still relies on coal for its energy, though to a much smaller extent than it did 10 years ago.

- Crime has risen, as has unsolved crime.

- Sovereign debt is at high levels.

- Pension schemes are under-funded.

As is the case in New Zealand, British law firms are in the spotlight, accused of appalling behaviour towards their younger, female lawyers.

Yet Britain contributes more to NATO than much stronger European countries.

Perhaps Malta and New Zealand should be grateful that as islands with no belligerent neighbours they do not need to spend high levels of their revenues on defence.

If I were allowed to intervene in Britain for one day, I would want a second referendum on the EU, preceded by a clear display of the pros and cons, accompanied by costing and the effects on lifestyles.

My guess is that Britain might yet conclude that the best outcome would be an ongoing role, with new energy devoted to changing the EU rules that the British dislike.

However without a second referendum, such a luxury might not be available.

It seems Britain will find no comfortable ‘’Brexit’’.

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Edward Lee is in Remuera 6 August and Albany 7 August.

Our future travel dates can also be found on this page of our website:


Any person is welcome to contact our office to arrange a free meeting.

Chris Lee

Managing Director

Chris Lee & Partners Limited

Taking Stock 19 July 2018


THE country in the world with the highest respect for money is quite possibly Singapore, though there may be a toss-up with Switzerland, which also pays great deference to financial markets.

Singapore’s earnest approach to the quality of life of its citizens is not neglected – its respect for the environment is far greater than our own – but as its newspapers illustrate, financial education is a serious subject.

Regularly it publishes the truth about capital markets.

It asks the question: Why do people choose to believe the great lies about investment success, such as the clearly oafish claim that timing does not matter, that the ‘’average’’ is a sensible aspiration (even in falling markets) and that research has no value.

Last week Singapore’s leading newspaper displayed this chart:

World sharemarket returns for the half year to June 30, 2018 (in Singapore Dollars)

USA                   plus       3.70%

Russia               plus       1.9%

Japan                plus       1.5%

Taiwan               plus       1.2%

World Index       plus       0.04%

India                  minus    1.1%

China                minus    1.5%

Hong Kong        minus    1.7%

Malaysia            minus    3.3%

Europe              minus    3.3%

Indonesia          minus   11.4%

Brazil                 minus  17.0%

It then displayed the top 10 international, research-based equity funds.

Their half-year returns varied from plus 9.6% to plus 18.8%.

A global index fund, weighted by the various market sizes, might have crept above zero returns.

Does anyone want to debate the value of research?

Anyone in a hurry to invest in KiwiSaver index funds?

Of course the index fund salesmen will quote Warren Buffet who, paraphrased, sensibly notes that those who do not want to be accountable for their own investment returns are better to use simple index funds than to invest at random.

Singapore might seem like a blessed country, in that its leadership has been more like a benevolent dictatorship than a democracy, where the lowest common denominator must be found.

Yet in physical assets Singapore is much poorer than New Zealand.

It has very little water, constant threat to its clean air (from bush fire fumes in neighbouring countries), no oil, and five million people living in an area the size of Lake Taupo.

Yet it has a million cars on the road, a number it controls by issuing entitlement orders to all who want to own a car.

Currently the cost of entitlement is close to a 10-year low, at just $25,000 for small cars, perhaps $30,000 for bigger cars.

Once you have bought the entitlement you may buy and run a car for 10 years. At that point you buy another entitlement.

A seven-door Toyota van costs a little more than $100,000 but depreciation is tax-deductible.

Some years ago Singapore upgraded its emission standards, rendering half a million cars unfit to use.

They were exported to Malaysia or perhaps New Zealand.

Generally, one never sees a 10-year-old car on the road.

If you have to pay $30,000 for your entitlement to own it why would you pay for a car with no or little value?

Public transport, of course, is excellent.

Private cars are useful for those who cross the bridge to Malaysia.

Singapore’s water deficiency so far has not cost the country as much as you would think.

Thanks to a 1962 agreement it buys raw water from the Malaysian source at Johor, paying the agreed price of one cent for one thousand gallons (4,500 litres).

It treats the water and exports some back to Malaysia for 50 cents per 1000 gallons, but the cost of treatment is $2.40 per 1000 gallons, so this arrangement is not a money spinner.

Nearly 40% of Singapore’s water comes from desalination of sea water, treating what is euphemistically referred to as ‘’unwanted’’ water (waste water), and rain catchment. The rest comes from Malaysia.

Industry uses 55% of Singapore’s water, domestic users consuming 45%.

 _ _ _ _ _ _ _ _ _ _ _ _

NZ thinks it is privileged to be visited each year by nearly two million Chinese tourists.

Thailand is more privileged.

It has ten million Chinese tourists each year.

 _ _ _ _ _ _ _ _ _ _ _ _

JAPAN is taking measures to restrict blue collar overtime, reacting to high levels of suicide from workers, who claim to be exhausted and bullied into ridiculous business habits.

Overuse of overtime is known as Karoshi, while power harassment is called Pawahara.

New laws will restrict overtime to 100 hours per month with an annual limit of 720 hours, implying that over a year, 2.5 hours of overtime per day, every day, is acceptable.

Sadly the new proposed laws do not cater for white collar workers earning more than $130,000 per annum.

They must soldier on, without protection.

 _ _ _ _ _ _ _ _ _ _ _ _

Families hosting Chinese students in New Zealand should be aware of a new scam, emerging in Australia.

Chinese students are being targeted by bullying scammers who force the students to send fake videos, recording that they have been kidnapped, tied up, and must be saved by a ransom.

Chinese parents have been duped into paying hundreds of thousands to rescue a son or daughter bullied into faking this kidnapping.

 _ _ _ _ _ _ _ _ _ _ _ _

THE island country of Malta has many similarities to New Zealand, in that it socialises wealth, education and pensions, is increasingly dependent on tourism, and is benign in its treatment of those down on their luck.

Its tourism sector flourishes and so too do immigration numbers, leading to some of the issues NZ faces.

Because it drives on the left, a legacy of Britain’s 120-year governance, many European tourists are flummoxed, and the cause of grief for an island with narrow roads. Malta is 7th equal in the world (with NZ) for cars per head, 359,000 cars registered in a country of 480,000 people.

Tourism creates new problems.

I will be suggesting to Malta’s tourism people that all drivers not accustomed to driving on the left be issued with a flashing green light to attach to their car roof, alerting drivers to a potential risk.

Perhaps NZ should use the same strategy for its rental fleet.

NZ might also focus on offering a chauffeured rental car, perhaps using all those people of senior ages who cannot find employment. I imagine a standard fee of, say, $150 a day, would attract drivers and would find willing users in nervous tourists.

Malta’s financial success – it operates its budget in surplus – is largely because it sells residential status to immigrants with wealth.

It also has attracted the world’s gaming market, using a generous tax rebate system.

It has been the first government in the world to control and promote blockchain technology, legislating to protect all parties. One bank is about to use the technology, as a trial.

Malta had the highest percentage population growth in Europe last year, ahead of Luxembourg, Ireland and Sweden.

I can identify two explanations, one being the weather, the other being the widespread belief in dated Roman Catholic doctrines.

The highest falls in population were in Lithuania, Croatia, Latvia, Bulgaria and Romania.

After Croatia’s win over England in the soccer, that country is expected to drop off the list when the statistics are next measured.

 _ _ _ _ _ _ _ _ _ _ _ _

WHEN I read that Hawkins Construction will leave many creditors stranded, I recalled a conversation of nine years ago when an owner of a large construction company explained the need for care.

He said his company would never again sub-contract to Mainzeal or Hawkins. He was convinced that neither company had a future.

If you wanted to know which contractors not to use, ask the sub-contractors, he said.

Those contractors that use their sub-contractors’ money as working capital were doomed to fail.

His theory will be tested in court soon, when the litigation funder LPF brings a class action against Mainzeal’s dreadful directors, chaired by the former politician, Jenny Shipley.

If this case is not settled, it will be worth attending.

The creditors of Mainzeal will be hoping for compensation totalling a sum well in excess of $100 million.

As I noted recently, the size of the war chest of LPF, after its recent victories, should have poor performing directors on red alert.

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Edward Lee is in Queenstown 26 July, Remuera 6 August and Albany 7 August.

Michael Warrington will be in Napier on 21 August (afternoon only).

Kevin Gloag is in Christchurch on Thursday 23 August.

Our future travel dates can also be found on this page of our website: https://www.chrislee.co.nz/request-an-appointment

Any person is welcome to contact our office to arrange a free meeting.

Chris Lee

Managing Director

Chris Lee & Partners Limited

Taking Stock 12 July 2018


DAME Margaret Bazley has a delicious way of using words.

She says what she thinks, succinctly and without emotion. She asks the tough questions, listens, thinks and then sums up her findings.

She was exactly the right person to investigate the vulgar and festering culture at the unlovable law firm, Russell McVeagh, disrespectfully known for years as ‘’the factory’’ but now indelibly stylised as the personification of the bullying culture that no decent person would tolerate. Bullies are cowards.

Bazley found that the Wellington office of Russell McVeagh was leaderless, that juvenile attitudes towards alcohol prevailed, that young women were harassed, and that no one was accountable.


Russell McVeagh is rightly thoroughly ashamed of itself.

That shame is not enough, in my opinion.

There should be substantial compensation for all those women whose careers have been jeopardised by enduring the crass behaviour of cowards.

The Russell McVeagh partners for years have been coining it, collecting bonuses that may well be unrelated to value-add.

How galling it must be for previous Russell McVeagh people who built the empire in the 1980s and 90s into a respected, but perhaps fee-hungry, firm.

One-time chairman Geoff Ricketts led a firm then that was commercially savvy, attracting lawyers with business skills, energy and ambition.

Some, like Ricketts, have gone on to successful careers outside law. Ricketts, as an example, is chairman of the admired bank Heartland, well led by Jeff Greenslade and well regarded for its transparency, consistency and culture.

Meanwhile Russell McVeagh has been an object of such disfavour that no sensible, talented young person should move there, without solid evidence of a new, fiercely controlled culture that, as Bazley suggests, should distance itself from childish abuse of alcohol and cowardly bullying of the fairer gender.

Russel McVeagh’s fall from respected status is not unique.

Last week I encountered the head of a listed company in the financial sector, a fine young man I have long admired, with good personal standards, a husband, a father of teenagers, and an ambition to improve financial markets.

He put it to me that all participants in financial markets – lawyers, bankers, sharebrokers, accountants – risk the development of a bad culture.

‘’Put together long hours, stress, extreme rewards and add alcohol and poor leadership and you ask for trouble,’’ he observed.

The key control, of course, is leadership.

In law businesses, those partners or specialists who drag in the highest fees are known as the rainmakers. The same applies in accounting.

For example in PricewaterhouseCoopers, Maurice Noone, the South Island manager, now retired, was a rainmaker, recognised for the lucrative accounts he arranged.

In sharebroking, the highest bonuses go to those whose talents are most recognised by clients.

Those FX traders or hedge fund managers who get bonuses of multi-millions are almost above judgement, their behaviour discounted, unless there is genuinely strong leadership.

It is generally fairly easy to spot law firms where the leadership is weak. That silly behaviour often is revealed in their threatening letters.

I well recall receiving silly threatening letters from under-baked lawyers, probably written to impress their clients (and justify their fees), rather than written with any hope of changing a response to their unadmired clients.

Instinctively one knows that these firms lack leadership.

A strong firm would ensure the client is told his behaviour should change rather than be reinforced by the law firm’s letters seeking to stop others (like me) displaying publicly, disrespect for poor corporate behaviour. Good advice often is not what vainglorious clients want to hear.

Occasionally one spots good leadership.

A letter will arrive politely offering an alternative opinion on a contentious issue, and a suggestion that the lawyer’s client would like to discuss that view.

Leadership lies behind that approach.

Such an approach earns respect but in poorly-led organisations such honest advice is rare.

Bazley has done the law firms a great favour by publishing her relevant and clear views, and her observation about leadership.

In the respectful words of someone whose vocabulary may be out of fashion, she is quite a dame.

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THE media report that only one in five adult New Zealanders feels comfortable about investing in shares is a report that, as happens too often, trivialises a very important subject by providing a faux answer to an irrelevant question.

The media report relied on an interview with a young lady who co-founded a start-up internet-based company that seeks to get young investors to put a minimum of $5 a week into managed funds.

With respect, this new start up is not the right commentator on trends or investment attitudes.

All people in the capital markets will salute the effort to create a new pathway for beginners, not just because the pathway may lead in years to come to genuine investment interest, or helping grow investor wealth, but links to the need to improve financial literacy.

We applaud their efforts. Every market participant wants the education curriculum to include financial management and improve financial literacy.

However, the belief that only one in five adults who were surveyed felt willing to invest in shares is not news at all.

Nor is it news to declare that the biggest group of share investors live in Auckland, are aged 60 or more, and are predominantly white.

The truth is that more than half of the 2.5 million people who invest in KiwiSaver have sharemarket exposure, another five percent of the adult population invest in other managed funds and about five percent of adults also directly own shares listed on the NZX.

Those figures are logical and will never change much, unless the Government allows KiwiSavers to self-manage their superannuation, as the Australian public are allowed to do.

Extreme housing prices here, leading to high levels of debt are a factor, as has been the sensible decision of many New Zealanders to use rental housing as the core of their retirement assets.

When inflation in housing prices was rampant, driven by real demand, not speculation, then investing in residential property made ample sense.

Of course those who bought A2 Milk, or Synlait, or Ryman, or Ebos, or Mainfreight, or Fisher & Paykel Healthcare, or Heartland Bank or Xero would all argue that their share investing grew their wealth faster than any residential property did.

That is not the point.

Risk tolerance, knowledge, access to information, access to leverage . . . all these become issues.

The truth is NZ has a high level of money invested in residential rentals relative to most other countries, a relatively low number of reliable, transparent public companies, and an utterly inadequate number of experienced, knowledgeable financial advisers available to those starting to build wealth.

The media coverage was neither insightful nor relevant except that it led to some industry chatter. In turn that might lead to more effort to solve the vexed question of how to link small investors to genuinely valuable advice.

Buying $5 a week worth of a share fund is a starting point for a youngster and it will help the youngster to discover that it can be fun to learn about big companies.

That is the point of Sharesies, to provide access to managed funds for investors who may not be able to afford the usual minimum amount.

But let no one confuse that contribution to a new start-up with the really important subject of managing wealth.

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AS discussed some weeks ago, the outcome of the High Court case taken by various kiwifruit growers against the Crown has been published, the court finding that the Ministry for Primary Industries does indeed owe a duty of care to the industry participants.

The judge of the case has found that MPI and its insurers will be liable for the losses that followed the importation of contaminated bee pollen, which later delivered a virus (PSA) to the vines of kiwifruit orchardists.

The cost to growers was in billions so the damages claim is likely to be several hundred million, an eye watering figure that dwarfs any previous awards, bar the award made against Treasury and the Crown, when Treasury structured an illegal deal with Allan Hawkins at Equiticorp 30 years ago.

On that occasion Treasury’s incompetence cost taxpayers close to half a billion dollars and in effect meant that rather than receiving $300 million for the sale of the Crown asset NZ Steel, Treasury paid the buyer $200 million and gave them NZ Steel.

This victory for the kiwifruit growers is highly significant, not only in money terms.

It must lead to analysis of what responsibility, if any, rests with MPI over the spreading of the mycoplasma bovis disease, which will have cost the dairy farmers and sharemilkers an immense sum.

The insurers of MPI will, like Queen Victoria, be unamused.

The outcome of the court case is also a huge vindication of the model that funded the plaintiff’s case.

The multi-million-dollar costs would never have been raised from the kiwifruit growers.

Funding came from the impressive team at the LPF litigation funding group, headed by chairman Bill Wilson, a supreme court judge years ago, directed by Phil Newland, ironically an ex-Russell McVeagh lawyer, and by Bruce Sheppard, the agitator and accountant who correctly fingered Hanover Finance as the dreadfully governed and most toxic of finance companies.

LPF will have an agreement with the kiwifruit complainants that shares the court award. If the award is hundreds of millions, as implied, LPF will have a war chest of tens of million, perhaps close to a hundred million.

Given that LPF has recently gained a vast sum after tackling the disastrous property development empire built in Christchurch by David Henderson, there may not be much room left in the war chest.

The Henderson case was settled confidentially by the auditors, PwC, the directors and some valuers, aided, of course, by insurers.

My guess is that PwC agreed to pay tens of millions and that the total settlement was the thick end of a hundred million, LPF’s share close to a quarter of that.

LPF has now taken on more than a dozen cases, won them all, and will have soon hundreds of millions for those who had suffered losses because of the incompetence or negligence of others.

If its war chest now has tens of millions, the shareholders in LPF will have a tidy return and may be emboldened to take on more cases.

The CBL disaster might be one such case, regulatory failure, as well as director failure being of interest.

New Zealand needs to tackle the issue of regulatory failure, one day. A court will need to determine whether the regulators meet their obligations.

I imagine the investors in mortgage funds and finance companies a dozen years ago would have been knocking down the doors at LPF, had it been around in 2008, when the dreadful regulatory failures surfaced.

New Zealand does not want a litigious culture similar to America’s but we do badly need a skilled operator to tackle those who fail and then use their deep pockets to scare off those seeking compensation.

LPF now has proved that it has skill and has an ongoing role to play, in the justice system.

Perhaps its successes will mean it will remain a privately funded organisation but if ever it chose to offer itself as a candidate for NZX listing, I would be wanting to participate in the offer.

Wilson, Newland, Sheppard and more recently Michael Stiassny make a meaty team, along with its CEO, Jonathan Woodhams.

They might be the team to hold many government entities to account.

The likes of Treasury, the ACC and the market regulators might want to regard them, respectfully.

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THE next Taking Stock will have a European theme, as usually happens at this time of the year.

The European Union right now is stressed, Italy being a focal point, given its new government’s unenthusiasm for its Brussels-based masters.

The European central bank is under pressure to defer the decision made earlier, that it would soon cease to buy the junk sovereign bonds of the likes of Italy and Greece.

Fairly obviously, Germany will be reluctant to prolong those bond purchases if Italy is to degenerate into a ‘’loose cannon’’ category.

It will be fun to learn what outcome is being forecast by business leaders.

Britain’s exit from the EU is to be outlined by October.

That too, is game changing.

I will listen carefully!

 _ _ _ _ _ _ _ _ _ _ _ _


Edward will be in Queenstown 26 July, Remuera 6 August and Albany 7 August.

David will be in Palmerston North and Whanganui on 17 July and New Plymouth on 18 July.

Mike will be in Napier 21 August.

Our future travel dates can also be found on this page of our website: https://www.chrislee.co.nz/request-an-appointment

Any person is welcome to contact our office to arrange a free meeting.

Chris Lee

Managing Director

Chris Lee & Partners Limited

Taking Stock - 5 July 2018


Kevin Gloag writes:

THE current trade tensions and tariff threats, lead by the US, are creating plenty of uncertainty in financial markets and volatility has returned.

Trump promisedvoters he would deal with trade imbalances as he went about restoring jobs and making America great again, and in his own unusual style that is what he is now attempting to do.

Trade wars lead to increased prices and lower growth. Everyone agrees there will be no winners in a full-blown trade war, certainly no collective economic victory.

A little demand inflation (good inflation) signals a healthy economy and consumer confidence.

Unfortunately trade wars don’t increase demand. They increase costs. Cost-push inflation (bad inflation) reduces supply and increases the cost of inputs.

Eventually I expect matters to be resolved with Trump claiming victory, although the bluster will continue for some time yet.

Trump is a showman with a tendency to shoot from the hip, making outlandish statements and then softening them and using them as negotiating tactics.

Unlike previous White House administrations, which have used home ownership as a measure of success, Trump is using the stock market as both the barometer of his success and to demonstrate the strength of the US economy.

With mid-term elections coming up in a few months he won’t want to see the S&P 500 index down 10% or more as a result of a full-blown trade war, nor will he want to face-up to angry farmers who have been penalised with tariffs on their products.

He may not yet recognise the disconnect between his financially struggling voter and the share market - they have nothing in common.

Trump is a loose-cannon with a big ego but he surely won’t jeopardise his position of power through complete foolery although his irrational behaviour is likely to provide continued volatility and possibly some buying opportunities for investors.

How quickly things change - it is only six months since Trump returned from Beijing boasting “a very, very, great relationship” with his Chinese counterpart, Xi Jinping.

I wonder what President Xi actually thinks of Trump - a real ‘plonker’ I suspect.

 _ _ _ _ _ _ _ _ _ _ _ _

AS we have mentioned on many previous occasions global financial markets take their lead from the US so the health of the US economy and the likely direction of its interest rates are hugely important for all developed economies, including NZ.

Despite Trump trying to sell a positive message about the US economy many economists believe the US economy is now sending serious signals of being late in the economic cycle.

It seems the strong share market rally in May was largely driven by share buybacks following tax cuts in the US which slashed corporate rates and encouraged companies to repatriate offshore cash, not optimism or growth in the US economy as Trump would like people to believe.

A bigger hurdle for sharemarkets might be that based on fundamentals, like earnings, many US companies look expensive with a lot of good news already priced in to share pricing. The NZ sharemarket is no exception.

Another indicator that the US economy might be past its peak is that the US budget deficit is growing at a time when the unemployment rate is falling, something that hasn’t happened in nearly 80 years. A stronger economy should deliver more taxes enabling fiscal surpluses and debt reduction, yet the opposite is happening.

Fiscal stimulus, through a $1.5 trillion tax break and $1.3 trillion government spending bill, would normally come in the early stages of an economic recovery, not when the economy is supposedly running on all cylinders.

If the tax cuts and spending cap increase continue to boost inflation in the short term the Fed will find itself in the awkward situation of having to continue raising rates as the economy slows. This scenario would not end well.

Movements in interest rates are driven by inflation and inflation expectations.

The Fed is currently pushing up short term rates to head-off inflation from recent stimulus (tax cuts, etc.) but longer term rates in the US (5 to 30 years) are sending a very clear message of low long term growth and low inflation expectations.

I had thought that slightly higher long term interest rates in the US was a chance, not based on higher inflation but the fact that the US government needs to issue more debt to fund its growing budget deficits. Increasing issuance at a time when the Fed is reducing its bond purchases may suppress growth but it may also suppress inflation.

Like many others I believed that more bond supply and less buyers would mean higher rates but I am no longer convinced this will be the case for two main reasons.

Firstly, even though they cause most of the market turbulence active traders and investors still flock to the safety of US Treasuries during uncertain times. This drives down the yield on US Treasuries, as we have witnessed on numerous occasions in recent months.

In addition to their safe haven appeal a return of around 3.00% doesn’t look too bad when you compare to some other 10 year bond yields  - Japan 0.04%, France 0.74%, Germany 0.34%, UK 1.30%, Australia 2.65%, New Zealand 2.92%, Italy 2.89%.

No wonder the US dollar is on a strong trend at present.

(A rate of 4.10% is available on Greek 10 year debt if you have the stomach for it. Mario Draghi says they are doing really well and I’m sure he wouldn’t pull your leg).

Secondly and more importantly, bond markets are sending a very strong message about where they see long term growth and inflation; basically they don’t see any.

In the US the current yield spread between 2 - 10 year and 5 - 30 year US Treasury notes is only 30 basis points. This is their lowest level since 2007 when the US economy was headed into its worst recession in 80 years.

If the Fed continues to raise short term rates in the US, as it has signalled, yield curves would become flat and might well invert this year, meaning short term rates would be higher than long term rates.

An inverted yield curve has preceded all nine US recessions since 1955. The recessions have arrived in as little as 6 months and as long as 2 years after the inversion.

In my opinion investors need to look through all the spin about economic expansion. That spin is being offered by central bankers (sponsors using Other Peoples Money), politicians and Wall Street media. Listen to the bond market. It has an uncanny, widely reasoned, knack of being right.

If it wants to avoid an inversion the Fed could always scale back its planned increases to short term rates or try to manipulate longer terms rates higher by increasing the supply of long dated Treasuries into the market, but there’s no sign of a changed strategy yet.

History would say that the Fed will ignore market warning signs. Recent comments from Fed Chairman Jerome Powell suggest that he sees it differently and the rate hikes will continue.

The following analysis from portfolio strategist Michael Pento summed it up for me:

“The reason why bond yields remain at incredibly low levels in Europe, Japan and the US isn’t about the dwindling vestiges of QE; but much more about a perpetual state of economic anaemia brought on by debt-disabled economies throughout the globe.”

A recession would lead to lower interest rates and in regions where rates are already low, or negative, more money printing.

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PEOPLE who had to endure the high interest rates of the ‘80s could be excused for not sympathising with borrowers today who face the prospect, albeit slim in my opinion, that rates might soon start to lift off their historic lows.

In fact most of those who paid the high rates 30 to 40 years ago will now be retired and find themselves subsidising today’s borrowers with historically low investment rates.

The yield on US 10 year Treasuries, the benchmark for global interest rates, recently broke up through 3% for the first time since January 2014 prompting some experts to predict a higher path for rates, although I think they are forgetting about the impact of higher rates on debt servicing and what happens when people can’t afford to pay.

I remember well the days of 20% plus interest rates.

I was working at South Canterbury Finance (SCF), in what those of us who worked there in the early days refer to as the ‘old’ company before the ‘goons’ arrived and bludgeoned it to death with ‘Russian roulette’style property development lending.

When I joined SCF in the late ‘70s, after a stint at the BNZ, SCF was a small but growing consumer lending finance company, lending mostly on motor vehicles, motor cycles, boats and caravans and the odd small business loan.

Lending included both direct lending and loan contracts received through a network of second hand car dealers, boat dealers , etc.

The company was 100% funded by retail debenture investors, all direct investors; no monies were received through brokers in those days.

We lent money at roughly the same rate we were paying on our debentures.

In the mid-80s I recall deposit rates of 23% for 1 year, 22% for 2 years and 21% for 3,4 and 5 year terms. (Note the negative yield curve and remember what happened next, 1987).

At the time the majority of our investors elected for the highest rate and shortest term and 12 months later we were able to rollover most of this money at 16% as rates started to drop leading into the 1987 share market crash and recession that followed.

Lending rates through this period were around 20% flat which equates to a true interest rate of around 35%, plus we charged a documentation fee and often consumer credit insurance, neither of which had to be included in the true interest rate calculation in those days.

Call rates at the bank were around 16% and bank mortgage rates were in the early 20%s.

Around the same time the Muldoon Government had an issue of Government Stock to retail investors at an interest rate of 17.5% p.a. with quarterly payments and a 30 day call-back period on your money, and brokerage of 2.50%! (Bring back Sir Robert)

Borrowing rates of 20% plus were stressful times for many businesses, especially farmers, but most wage earners managed OK and from my experience  interest rates were never really the consumers main focus, rather - how much a month and can I afford the repayments.

In the period 1970 - 2000 wage inflation in NZ was rampant with wages increasing 200% - 300% and while it was often tough going for business owners this wasn’t the case for the hired help.

Since 2000 wage inflation has been weak and combined with over-indebtedness is one of the major reasons developed economies have been struggling to generate inflation over the past decade.

The other obvious advantage borrowers of that era had over today’s borrowers is that in the 80s house prices were more in touch with what we earned.

In many cases the person paying off his car at a true rate of 35% would also be paying a bank mortgage at around 20%, often on one wage with young children.

The reality is it was much easier to scratch up a deposit of 20% and meet the payments on a house worth 3 times what you earned than today’s situation where average house prices in NZ are nearly 10 times the average wage. (This relative house pricing between then and now is the same as 7.20% compounded interest cost/income for 20 years straight).

So despite paying extremely high interest rates during that era the principle amounts of the loans to buy a house were so much smaller, making the loan repayments quite affordable.

Winston Peters said recently he would like to see average house prices no more than 6 times the average wage, a target that would require current house prices to fall by about 40%, or average wages to increase by 66%.

Under Housing Minister Phil Twyford’s stewardship anything seems possible to me although I’m sure that a Twyford induced national housing disaster is not quite what Winston has in mind.

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ON the subject of politicians I note that some are calling for the Winter Energy Payments to be means tested, or basically wealthy superannuitants to be cut from the scheme in favour of addressing child poverty.

This follows calls from at least one would-be politician, and cat-slayer, to halve the amount of NZ Super payments and then means test to see who requires additional support.

My view is that most people who reach retirement with wealth have worked hard, made good decisions and normally a lot of sacrifices and often owned businesses providing jobs and opportunities for other people.

Throughout their working careers they will have contributed plenty in taxes, often at the highest rates, and even in retirement they will still be contributing through taxes on their investments.

If they ever end up in care they will have to look after themselves.

If the Government introduces a wealth tax they will be up to the plate again.

Needless to say I strongly believe that those who have put plenty into the pot during their lives should be entitled to a little back, regardless of their wealth. I am a fan of the gold card too.

NZ doesn’t have child poverty in a real sense (global travellers know this); our welfare system is very accommodating.

Certainly some children are missing out but this is the result of bad parenting, not a bad system.

Unfortunately in NZ we have an element of people who aren’t fit to be parents, but they have children anyway, expecting the system to support them and the police to manage their behaviour.

In my opinion our politicians and social welfare strategists should focus on problems like these rather than taking assistance away from those who have worked hard or are trying hard.

New Bond Offer

WEL is a multi-network infrastructure group of companies that owns and operates electricity distribution assets predominantly in the Waikato and telecommunication assets in Waikato and other North Island regions.

WEL is the sixth largest electricity lines company in NZ with approx. 90,000 connections in the Waikato region and a regulated asset base of $529 million.

WEL also indirectly owns 85% of Ultrafast Fibre Limited (UFF) which is NZ’s second largest fibre network business and on completion will account for 13.7% of the Government’s Ultra-fast Broadband Fibre initiative.

UFF has a current asset base of $450 million and is growing rapidly. It operates a 3000km long fibre network with the ability to serve 200,000 consumers in the Waikato, Taranaki and Bay of Plenty regions.

For the year ended 31 March 2018 WEL reported revenue of $175.6 million, net profit after tax of $13.4 million and net cash flows from operating activities (the business) of $93.8 million.

At 31 March 2018 WEL had total assets of $1,150m, total liabilities of $619m and total equity of $531m.

WEL Networks Limited is now offering up to $150 million subordinated fixed rate bonds.

A minimum interest rate of 4.90% has been announced with the final rate and margin to be set on 9 July 2018. WEL will pay the distribution costs so clients will not be charged brokerage.

We have started a list for interested investors and bid for a firm allocation on Monday, 9 July.

The issue then opens on 10 July and closes on 27 July.

A research item is available on the Private Client Page of our website for advised clients and a general description of the offer and issuer is also available under Current Investments on our website.


Edward will be in Queenstown 26 July, Remeura6 August and Albany 7 August

David will be in Lower Hutt on 10 July, Palmerston North and Wanganui on 17 July and New Plymouth on 18 July.

Our future travel dates can also be found on this page of our website: https://www.chrislee.co.nz/request-an-appointment

Any person is welcome to contact our office to arrange a free meeting.

Kevin Gloag

Chris Lee & Partners

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