Taking Stock 17 October 2024

INVESTORS will know, and possibly everybody who was an adult in the 1990s will know, that until the 1990s bank managers and bank executives were almost exclusively men. 

The task of widening the management group, and the potential to discover future managers and executives, barely started before the 1990s. 

It took at least a decade of providing the experience, confidence, and the opportunity for the talent pool to be doubled. 

Even in the years between 2000 and the Global Financial Crisis (GFC) in 2008, the search for talent was largely within just a half of the population. 

Of the 60-odd finance companies that existed in 2006, very few, if any, as I recall, had female chief executives and women were a tiny percentage of directors in the sector. 

The GFC might have been the trigger for change. 

For many years now our banks have been led by women. 

A cynic might link this rise to the simultaneous rise in angst amongst male bankers, regulators, shareholders, and society. 

An increasingly female-dominated television, radio, and print sector was also highly aggressive towards men, some managers almost hounded out of office. 

A cynic might argue that finding the right talent with the gender that does not have a Y chromosome helped banks to quell the angst with the regulators and the media. 

This might also have been a hat-tip towards women leaders with a relatively clean slate, much lower levels of entitlement, and a desire to penetrate glass ceilings, resulting in hard work and great attitudes without expectations of gross overpayment or absurd expense account claims.

(Remember the male bank CEO who claimed removal costs for his wine collection, and remember the era when the likes of Merrill Lynch and Macquarie paid such absurd bonuses to mediocre people that the word larceny comes into conversations?)

Some diabolically unexceptional people now boast about the wealth resulting from nonsensical bonuses.

So today we have women managing our biggest banks and in recent weeks we have observed discussions with reporters that were not just platitudinous or trite corporate waffle. 

Antonia Watson, ANZ's chief executive, raised the extremely topical subject of tax on REALISED capital gains. She was careful to emphasise "realised" gains and not blunder into goofy discussion on impossibly unwise "wealth" taxes, or taxes on unrealised "valuation" gains.

She probably recognised that "wealth" taxes are as improbable as a tax on those who use the free drying process of a clothesline.

Within minutes of her sensible comments, talkback radio and, sadly, mainstream media had converted her careful words into a plea for a capital gains tax, or a wealth tax.

She said no such thing. The media was ascribing to her an ideology to which she does not subscribe, neither does the woman who is CEO of the ASB, Vittoria Shortt, who also sees the need for reform.

Investors will find this need for tax reform important. Two of the women running our biggest institutions are not the equivalent of the appearance of a single swallow pretending change is in the air.

The world is over-indebted, running fiscal deficits as though more debt was a solution to excessive existing debt.

France has responded by cancelling its annual indexed rise for pensioners and beneficiaries, effectively breaching a promise.

France plans to cut spending over two years by NZ$110 billion, with around $15 billion in social security cuts, $25 billion in state spending cuts, and $6 billion in cuts from local government.

It plans to increase its tax revenues for two years by raising $22 billion with a special tax on large companies and a further $5 billion from new taxes on households.

The Finance Minister said: "The French economy is holding up, but our public debt is colossal. It would be both cynical and fatal not to see, say it and recognise it."

He plans a "temporary" levy on some 440 large profitable companies with annual revenue exceeding NZ $1.6 billion. It would generate $12 billion in 2025 and a further $6 billion in 2026.

An "exceptional" tax on maritime transport companies would apply, raising nearly a billion in each of those years.

The government proposes a special tax on air travel and on private jets.

Because of France's huge sovereign debt, and its ongoing fiscal deficits (5% to 6% of GDP), it pays a penalty margin for its sovereign debt of 80 basis points more than Germany. On a trillion of debt that would cost France an extra $8b per year.

Germany's deficit is just south of 3% of its GDP, 3% being the highest figure allowed by the European Union, without penalties.

So France has reacted, and also acknowledged the weather is changing.

The Netherlands has reacted, with a similar attitude towards travel. Its solution is to ban any advertising of cruise ships or air travel.

France has not reacted in just a negative way towards new taxes.

The CEO of Total Energies, France's fourth largest company, accepted a proposed 1% tax on share buybacks.

"There needs to be a response to the sense of growing inequality," he told the media. "But all these extra taxes must be accompanied by higher cuts in public spending."

To revert to the socially wise, carefully couched comments of our female banking leaders, their suggestion was for a new tax on realised gains (where cash is available to pay the tax).

And they saw a need to tackle the national pension, surely in need of means testing, and a review of the age eligibility, perhaps splitting the pension into a universal component and a means tested top-up.

Multi-party agreement must precede such a change.

By coincidence I met last week with a distinguished New Zealander who had lived in Switzerland when it had introduced a capital gains tax that included a tax on profits from the sale of the family home.

He recalled how Switzerland had an allowance for an untaxed amount of the gain and, as so often happens with ground-breaking tax systems, a most unwise anomaly.

It allowed a home to be sold to another family member for a gain that was not taxed at all.

So a $1 million house purchase, which over the years might increase in value to $5 million, could be sold to one's family for $5 million without tax. The house could later be sold back to the original family owner for $5m, meaning any future sale to non-family would be taxed much less from the higher start point.

That reminded me of the tax distortions that arose when Jim Bolger and his Finance Minister Ruth Richardson introduced a surtax on the national pension for those whose separate income exceeded $14,000. This occurred in the early 1990s and gave birth to vast numbers of off-the-shelf family trusts.

At the time, I had a client in a rural centre who was able to lend his capital to his daughter at 1%, thus leaving his extra income at less than the $14,000 threshold.

But his daughter then paid his rates, his power bill, his insurances, his grocery bill, his fuel bill, car registration and his cosmopolitan club membership. He had low income, but no bills, no surtax and lived very cheerfully on the pocketmoney from his national pension.

The point here is that stupidly designed, hard to collect, unreasonable tax systems lead to creative avoidance.

Our female bank chief executives, oozing common sense, should be co-opted into a committee to design sensible new taxes and redesign our pension scheme.

Investors need to know what levels of risk they need to take to meet their after-tax spending habits. 

My guess is that just as the banks courted political, regulatory, and media popularity by removing "fat cat" men from the equation, so too might the next advances in tax fairness be proposed and defended by successful women from the financial sector.

Change is inevitable.

Nobody would want commercially incompetent political leaders, of whom we have had many, to be left in charge of devising sane structures and trying to sell it to the public, fed by the minorities which make up our media.

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A FEW years ago I hosted a private dinner with many of the business leaders whose achievements and views I admired.

I recall that after several hours of discussion focused on the major issues of global debt, weather change, China's expansion, geopolitical tensions, NZ's dreadful leadership, and inequality, we then focused on what was the most threatening of these concerns.

Those in the room had combined wealth probably exceeding a billion dollars.

Their biggest concern was . . . inequality.

Envy taxes would never work to ease inequality.

But as our female bank leaders noted, a tax on REALISED capital gains might be a great starting point.

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FALLING employment, rising costs, and absurd house prices might explain the financial markets' views that interest rates will fall quickly to a level where 5% mortgages may be possible.

The view may be that only "free" money can jump start (or sugar rush) a revival in consumer spending.

There are many changes occurring in financial markets that confuse those whose jobs it is to forecast rates. 

Changes are occurring globally such as:-

-Private debt funds taking on high-rate, high-risk lending, funded by pension funds (other people's money).

-Open banking, possibly allowing barely capitalised organisations to enter markets.

-Crown guarantees of bank deposits, possibly resulting in a transfer of default risk from depositors to the Crown.

-Fierce debate about the inexplicably high margins applied to the agricultural and horticultural sectors, that margin in NZ being around 5% higher than mortgage margins.

-A mountain of global corporate bond debt to be refinanced within the next 12 months. Will private credit, funded by pension funds, chase the rates implied by higher risk?

New Zealanders anticipate bank deposit rates around 3-3.5% and senior bond rates around 4%, mortgage lending rates around 5%.

Yet there is no evidence that the world would subscribe to NZ government bonds to fund our huge deficits and growing debt at rates below 4%.

The same applies to 10-year US debt where the rate still is around 4%.

These anomalies suggest that a return to low cost of debt might be a dream.

Yet another woman, Nicola Willis, will need to figure out these conundrums. 

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Travel

Chris is giving a talk to a group in Arrowtown on Nov 14 and would enjoy meeting individually with clients before the 3.30pm meeting. He some available times in the afternoon.

Our advisers will be in the following locations on the dates below:

29 October – Takapuna – Chris Lee

30 October – Ellerslie – Chris Lee

1 November – Lower Hutt – Fraser Hunter

8 November – New Plymouth – David Colman

13 November – Ellerslie – Edward Lee

14 November – Albany – Edward Lee

15 November – Auckland CBD – Edward Lee

14 November – Arrowtown – Chris Lee

28 November – Napier – Edward Lee

29 November - Napier – Edward Lee

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee and Partners Limited