Who’s to blame for Kiwis’financial pain? Seymour may have the answer

As  inflation hits  levels a  generation of  New Zealanders hasn’t  seen, politicians are thrashing  about,blaming anyone but themselves for the   financial  storm  enveloping   households  and  businesses  alike.

The  official  cash rate has already  risen  from a Covid low of 0.25% to 3.5% and is expected to hit 5% or  higher.

Grant  “look, no hands” Robertson tells  the  Dominion-Post  the  banks’  social licence   requires  them to  support  borrowers “if  times get  tough”. 

Meanwhile  over  in the  NZ  Herald,  the  Greens’ Julie-Anne Genter  says  we need  a  tax  system that prioritises  people  over profit.

Lessons galore from Bernanke’s Nobel prize

Nobel prize committees are responsible for briefly focusing the world’s attention on some pretty recondite stuff.  Sometimes with comic results.  But occasionally, they get it just right.

As the years rack up since 2008 global financial crisis, Ben Bernanke’s economics prize – resting in part on his work on the financial collapse of the Great Depression – looks righter and righter.

It was certainly the world’s good fortune (that or G. W. Bush’s foresight) that put the leading contemporary scholar of the monetary and banking disasters of the 1930s in the chair of the US central bank at the right time.

Thomas Cranmer: Three Waters and One Mountain of Debt

The proposed debt financing of Three Waters has received little coverage in the media but it brings its own set of risks to the reforms which could turn out to be ruinous for the country’s finances. 

This article is the sixth in a series by Thomas Cranmer, the pseudonym adopted by a legal analyst who has been carefully dissecting the Three Waters legislation. He writes: 

Before starting on a discussion of the proposed debt financing of Three Waters, I have a disclosure to make: whilst on Substack I am usually writing on topics that interest me based on my general knowledge and experience as a lawyer, in this instance I am writing as a lawyer who has practised as a leveraged finance and restructuring expert for 25+ years – starting in New Zealand at one of our leading law firms and then, for many years in the UK. I’ve acted for borrowers, banks, hedge funds and private equity sponsors putting these deals together and then restructuring them more times than I care to remember.

The majority of these deals are in multiple jurisdictions including the US, Europe, MENA and Asia Pacific and cover all manner of sectors including utilities and privatised government assets. I failed at becoming an All Black or a writer, so this is my bag.

Politician keeps promise – markets fall

They suspected that they might be electing a radical, but to their great surprise, Britain’s Conservative party members found out on Friday that they had also elected a party leader who meant what she said.

British politics may take a little while to recover.

New finance chief Kwasi Kwarteng delivered a package outside the parameters of fiscal orthodoxy, headlined with big personal and corporate tax cuts and some scary debt projections.  Certainly the Treasury advice could be summarised as ‘you’re on your own, mate’.  But then smart ministers know that anyway.

Kiwi dollar’s slippage brings Robertson’s “robust economy” rhetoric into doubt

Just   as   New  Zealanders start  planning  their first overseas  travel  since Covid  led  to  lockdowns,  they  find their dollar  has  slipped  in  value  against  other  major  currencies.

This could   be  of  particular concern  for  those  senior  citizens  who  were looking  forward to having  a  break during  New Zealand’s  winter  months  in the  sunshine   of Australia’s  Gold  Coast.

The  irony  of  the fall in  the  value  of  the  NZ  dollar is  its  contrast  with Finance  Minister Grant Robertson’s  insistence  that  the  NZ economy  has performed  strongly  (under  his  guidance) through  the  pandemic.

On  that  point some  authorities  have noted the  NZ  dollar has  lost  ground in  comparison  with  Australia, even though  NZ  has  higher  interest rates   than  Australia.

But if  Kiwis  think  the  beaches in  Hawaii might  offer  better  value  for their dollar than those  of  Queensland,  they  will have to think  again,  because the  NZ  dollar  has slipped  also  against the  greenback.

There is a further message in the  comparison   with  the  AUD.  It implies  financial markets have  concluded   that  the  Australian  economy is  more  productive  than  NZ’s.

The  positive   to  be  drawn  from the  currency  movement  is  that   NZ’s  export  sector  will  have  higher  returns, (in local dollar  terms). The  dairy  industry  may  find it  offsets  the  lower  prices  recorded in the  fortnightly  Fonterra GDT  auctions, if  the  fall against the  US  dollar  to  below 65USc  is  sustained.

On  the  other  hand industrial commodities  have  been  falling  sharply:  this  movement  means  that returns  for aluminium  (from  the  Bluff  smelter) and  methanol   (from the Motunui  plant) will be  lower.

How the law aimed at protecting lenders (and their families) from loan sharks made it so much harder to borrow from banks

In October 2018 the PM popped up with Kris Faafoi, Commerce and Consumer Affairs Minister at the time, to announce a government crackdown on loan sharks.  Tough new measures were being introduced to protect people from loan sharks and truck shops

Jacinda Ardern said her government was committed to making New Zealand the best place to raise a child. To do this it must stop families becoming trapped in the appalling debt spirals and poverty that result from onerous lending and payback terms.

“These new measures will halt the very worst of those preying on vulnerable and desperate people while enabling borrowing that meets their needs in an affordable way.

 “They will protect families through capping the total interest and fees charged loans, introducing tougher penalties for irresponsible lending, and raising the bar for consumer lenders to register as a Financial Service Provider,” Jacinda Ardern said.

A Bill introduced to Parliament in April 2019 amended the Credit Contracts and Consumer Finance Act 2003 by strengthening requirements to lend responsibly, especially in relation to how affordability and suitability tests should be conducted, limiting the accumulation of interest and fees on high-cost loans, and providing new remedies and penalties for non-compliance.  It  had been enacted by the end of the year.

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.

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?

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.

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.