G7 – the view from the top is fine, if a bit fuzzy

The omens were good for the G7 summit at Carbis Bay in Cornwall.  Untypical blazing sunshine and a victory for England’s footballers in the Euro Championships put the hosts in fine fettle (qualified only slightly by the NZ cricketers’ series win).  

The first and most important objective was achieved: the world leaders managed to agree not to disagree. Even better, no one called the host, Britain’s PM Boris Johnson, “weak and dishonest”, no matter how much they might have been tempted.

But despite the 25 page summit communique, direction and leadership was a little harder to find.

Continue reading “G7 – the view from the top is fine, if a bit fuzzy”

No need to worry; the consensus says inflation isn’t going to be a problem

Ever since the 2008 financial crisis, pessimists have been saying we are due a global inflation surge. So far they’ve been wrong. The world’s economies, particularly the rich ones, have sucked up fiscal and monetary stimulus and the biggest official concern has usually been that the inflation rate is too low.

But even a stopped clock eventually shows the right time.  Given Covid-induced monetary and fiscal overdrive, might the worriers finally be proved right?

Continue reading “No need to worry; the consensus says inflation isn’t going to be a problem”

Half-year reports will enable investors to work out for themselves if surge is about to become bust

Boom or  bubble?  There is a growing divide in the  investment  world between  those   who think the recovery from  the Covid-19 pandemic will add extra impetus to stock markets  and  those who think  bubbles are inflating to  bursting point.

At  the  beginning of the year global stock market indices hit  new  highs,  adding  another chapter, as one commentator  noted, to 12 months of  apparent defiance of  economic   gravity. The  surge  prompted  the London  “Economist”   to  ruminate on what it  called  the  “crazy  upward march in stock prices” and why it might just continue.

In assessing  why  markets  could persist in “melting up”  the Economist pointed to several factors  driving the gains:  an end  to the Covid-19 pandemic  is in sight; rich-world governments are  rediscovering  the joys of  fiscal pump-priming; and real interest rates  are  so  low  as to make  sky-high stocks look cheap. It noted,  too,  that markets had been looking beyond the damage from Covid-19 to the post-pandemic recovery. Continue reading “Half-year reports will enable investors to work out for themselves if surge is about to become bust”

Market darlings falter but the rise of other stocks has lifted the NZX-50 to a new record

The  NZ  sharemarket bounded to a  new high on Wednesday, with the NZX-50 index surpassing  the previous  peak  to  climb above 12870.

Investors  are   not  exactly  dancing  in the  streets, although in  past eras they might have been.

But  there  seems  to be  a  clear conviction among investors  that  the  NZ economy  is  escaping from the  shackles of  the Covid-19  pandemic faster than  most others, and anyway, where else can funds  be  placed  for  a  decent  return (apart from  the  overheated  housing  sector)?

Strangely, too, the  market hit  its  new  peak  just  as the  gloss  had gone from the  stocks  which  had  enjoyed to that  point  the  status   of  market darlings, F&P  Healthcare  and  A2 Milk. Continue reading “Market darlings falter but the rise of other stocks has lifted the NZX-50 to a new record”

Can the world economy continue to float on a cushion of debt?

Monetary policy is difficult.

Economist Scott Sumner describes in his blog how the thinking of an intellectual giant like John Maynard Keynes evolved through three distinct phases in the 1920s and 30s.  As the man himself is reputed to have said “When the facts change, I change my mind.  What do you do?”.  Sumner then argues that the thinking of the economics profession repeated pretty much the same pattern of evolution over the last decades of the twentieth century.  

It makes a persuasive case for intellectual humility in general, and in monetary policy in particular.  Even more so in unusual times.  The forcefulness and fluency of experts can conceal the fact that they are testing new ideas when they make policy.

Continue reading “Can the world economy continue to float on a cushion of debt?”

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.