How a crash (of sorts) might come

History looks for a trigger for the economy crashing:  the 1929 stock market panic, the 1970s oil shock or the 2008 subprime meltdown.  But while the headline events can be a catalyst, sober analysis usually gives a more complex backstory of growing economic imbalances and disastrous-with-hindsight policy settings.

So casting the Covid shock as the proximate cause, what might be underlying drivers of a sustained deterioration in the economic climate? Continue reading “How a crash (of sorts) might come”

Making the most of it might be smarter than trying to fathom reasons for the NZX’s big bounce-back

Here’s a  conundrum:  thousands  of  New Zealanders   are  losing   their  jobs,  yet the  NZX top  50 index is  back  almost  to its  peak   of 12,065  it  hit  on  February 20.

Opposition  politicians  say  NZ is facing an economic disaster.  As  many as  150,000  jobs  could be  lost.  The  Reserve  Bank   believes unemployment  will rise to  9%.

The  sector which  was  the country’s biggest foreign exchange earner has been  shut  down. International education which brought  in  $5bn   has also gone down  the plughole. And   all  the government is   doing is  throwing  billions  at the  problem  in  wage subsidies.

Of  course  there is  relief that the country has succeeded in  quelling Covid-19  under the  leadership of  Jacinda  Ardern   (for  which   she is  admired  around the  world),  and has  moved to  alert level  one. Continue reading “Making the most of it might be smarter than trying to fathom reasons for the NZX’s big bounce-back”

Don’t expect too much if we get negative interest rates

Are central bankers jealous that epidemiologists are the rock stars of the current crisis?

There is talk that both the British and New Zealand central banks might institute negative interest rates as part of the policy response to the Covid shock.  Continue reading “Don’t expect too much if we get negative interest rates”

Building on CER: Jarden hires a “dream team” as it expands its finance business into Australia

In one of  the  boldest  moves in Australasian  financial  markets,  investment company  Jarden is  taking on the  Aussies  on  their home  ground.   It’s  an   invasion   which has startled the  business  world  across  the  ditch,  but  hardly   rated a  mention in  the  NZ  news  media,  preoccupied  as  they have been   with NZME’s  stuffing  up its  latest takeover   manoeuvre   for  its  rival  news  website.

Jarden, founded in 1961, has been on a growth and acquisition path over the past five years in NZ and its services now span investment banking, capital solutions, wealth management and direct broking.

Jarden Group CEO James Lee said the expansion in Australia is another milestone in Jarden’s history.

Up  till  Jarden  made  its move,  it has been  mostly one-way traffic in  the  Trans-Tasman financial  trade—  with  NZ   politicians  bemoaning   the  huge  profits  being  transmitted across  the  ditch.  Continue reading “Building on CER: Jarden hires a “dream team” as it expands its finance business into Australia”

Russia and the airlines – not the conspiracy you think

Russia Today (sometimes referred to as Kremlin TV) does not have a widespread reputation as a fair and balanced news source. But occasionally if they say it’s raining, you might want to check outside to see if you need an umbrella.

So there is some interest in its reporting of ‘Black Swan’ author Nicholas Taleb’s suggestion that the UK government should let Richard Branson’s Virgin Atlantic airline go bust, rather than bail it out.

“Planes will fly w/new owners!” as he succinctly put it.

Alert readers will recall that Point of Order raised this very point last week, less directly and with more technical verbiage naturally.

RT also reported (with ill-concealed glee) some nastier bits – quoting Taleb on Branson as “a tax refugee” who “walks around virtue-faking with [the] TED [and] Davos crowd”.

And made the unevidenced allegation that the airline industry had been hugely influential in preventing governments from halting flights from China in the early stages of the epidemic.

But back to the meat of it – should governments ‘bail out’ businesses and, if so, how.  The same question which arises from the global financial crisis back to the demise of Mosgiel Woollen Mills in 1980 (and before then to be clear).

The orthodox view is simple and principled.

When a complex entity is short of cash because of a crisis, but viable, you can provide loans at a penalty interest rate, that will be paid back.  In general terms, this is what happened for quite a few of the big US banks (leave aside the murkier case of the dodgy mortgage lenders). It’s at the heart of central banking practice and done well, provides support at a price, rather than a moral-hazard inducing capital bailout.

Of course the owners get the upside on recovery, and, if the liquidity is cheaper than the market, a bonus.  And historically those with the best political connections or visibility tend to get the most generous consideration.

If the business is not currently viable, there is a procedure to resolve the competing claims and distribute the losses.  It’s called bankruptcy. If possible, a working business is plucked out of the wreckage by new owners.  

This is what Taleb refers to.  This normally means writing down the value of the shareholders to near-zero, concessions by workers and bankers, and restructuring the business to new patterns of demand.  Note that if Mr Branson keeps his airline, the last two are likely to happen anyway.

And it’s more or less what happened with General Motors during the global financial crisis, except that in that case the government ended up chipping in an extra $11 billion, which helped reduce the pain for the auto workers and the company’s creditors.

To extend the analogy, the capital bailout of an airline by a government without a formal restructuring procedure will probably mean an even bigger increase in government debt (for us all to pay back through later ‘austerity’) in order to reduce shareholders’ capital losses and minimise the concessions which workers and creditors need to make.

This is somewhat different from the rest of us chipping in to help workers whose income has just fallen off a cliff.

But at the time it’s rarely so simple or principled. The politicians who make these decisions and the people who benefit from them are often keen to obscure the difference between temporary support eventually repaid and capital transfers.  Even now when the numbers are added up, who would have thought that Morgan Stanley got the former and GM the latter?

So Mr Branson’s airline – and indeed airlines more generally – are starting to look like a good test cast for who might get favourable consideration at the expense of the rest.

Nats support govt’s establishment of a venture capital fund to fill financing gap for high-tech companies

Critics  have long  lambasted  successive  governments  for their failure to  reverse  NZ’s woefully poor long-term economic performance.

So  Point of  Order  found   something positive  to address this in  legislation – given a third  reading in Parliament last week – that will establish a $300m  Venture  Capital Fund.

It’s the  brainchild  of  Associate  Finance Minister   David Parker   who   in an earlier  life  in  Dunedin  had  something to  do with  the  establishment of  A2  Milk,  now  one of the  top  capitalised  firms on the  NZX.

Parker  reckons   the  fund  will play an important role in building a more productive, inclusive and sustainable economy.  As  he puts   it,  NZ needs fast-growing businesses operating in a healthy, well-capitalised venture capital market. Continue reading “Nats support govt’s establishment of a venture capital fund to fill financing gap for high-tech companies”

China and India’s regional trade squabble echoes in Europe

India’s decision not to join the Regional Comprehensive Economic Partnership promoted by China is politically significant.  But its impact on trade and prosperity is more nuanced, as Bloomberg explains.

It avoids some market opening on both sides (India to agriculture; others to services) that would have been economically beneficial.  But the greater significance of the pact is the restrictions on access it would impose on those outside the regional trade grouping.

“Still, the effect of harmonizing standards at the regional-agreement rather than global level is the opposite of an opening of trade  … The standards that are established across the zone inevitably resemble those of its largest member. That would be fine in a global agreement, but in a regional deal the effect is to raise barriers to nations outside the bloc with different rules.” Continue reading “China and India’s regional trade squabble echoes in Europe”

There’s more to Libra than meets the eye

Confused by Facebook’s Libra proposal for a digital currency? The commentariat seems unable to decide if it’s a giant money-laundering cum tax-dodging scam or redundant on the grounds of necessity.

You might want to look at it from Mark Zuckerberg’s point of view.  The digital revolution has collapsed the cost of storing, transmitting and verifying data.  So we ought to be in a new golden age of money management: instantly and costlessly sending money around the world.  Er … not quite.  Somehow your bank wants you to spend more time with it than you would like, preferably bringing multiple forms of ID, whenever you have a new way of using your money.

Continue reading “There’s more to Libra than meets the eye”

RBNZ and the trading banks: it’s all a matter of striking the right balance

Finance  Minister   Grant  Robertson   has sought  to  calm  the increasingly  fierce  battle   over the  Reserve Bank’s  proposal to  force trading banks  to hold twice  as  much  capital  on their balance  sheets as they do  under  the  current  regime.

Stuff  reports   Robertson on Wednesday issued a message to the sector that the issue required “mature debate”  about the settings for  banks.

“I want to remind all parties that we are still in a consultation process. I am calling on all interested participants to listen to and work with each other constructively as this work is carried out.”

He  didn’t identify the party   he thinks is  falling short of  “maturity”   in the process,   or   failing to  work  constructively  on it.

But  he   did    hint  where    the  process  might end  up  when  he  emphasised:

The aim is to strike a balance which ensures a safe and efficient banking system that NZers need and deserve”.    Continue reading “RBNZ and the trading banks: it’s all a matter of striking the right balance”