World Bank likes US tax-and-spend plans, worried about trade policy; US house sale fails rise; Vancouver takes odd policy stances; Aussie property developers happy; UST 10yr yield at 2.34%; oil up, gold down; NZ$1 = 70.1 US¢, TWI-5 = 76.5

Here's my summary of the key events overnight that affect New Zealand, with news of housing news from the US, Canada and Australia.

But first, the World Bank says proposed American tax cuts and spending plans could deliver a shot in the arm to their economy and lift growth around the world. However these benefits could all be undone, they said, if America imposes new trade barriers that provoke retaliation by other countries. (See pg 59.)

In the US, there is an emerging trend of house sales failing to close after signed agreements. Oddly, no-one really knows why this trend should be rising at this time. In the December quarter, 4.3% of all sales failed to complete and that is up from 1.4% two years earlier. The problem seems to be most acute in the West. In Tuscon AZ, almost 14% of sales failed in the December quarter, in Ventura County, CA it was 11.6%.

In Vancouver, the craziness in their housing market has taken another turn. The Provincial government is now going to pay the property taxes of million-dollar Vancouver homeowners, and is in addition to last December's decision to offer loans to first-time buyers for down payments. The losers in all this are tax-paying renters, of course.

Remember Australia's scandal over government-funded insulation? And the rorting problems with ours too? Well the US has the same, and is financialising it, subprime-style. Investors there can't get enough of government-backed "energy conscious" loans bundled up into CDO packages. These are now the finance industry's fastest growing loan category. Any government-backed consumer loan scheme just seems to be a honey-pot for financiers who make contractors into loan brokers.

In Australia, property development professionals see its best prospects in two years, driven by expectations of strong growth in residential and office capital values. As a consequence and despite expectations of tighter finance and higher interest rates in 2017, the industry likes what it sees ahead regarding economic growth, and forward work expectations.

And staying in Australia, it is emerging that Fonterra is tightening it grip on troubled infant-formula company Bellamy's. Not only is it getting penalty payments for lower order levels, it has a 'poison pill' clause in place if Bellamy's shareholding changes by 30% or more, allowing it to walk away from supply. Bellamy's has few options at present.

In New York, the UST 10yr yield is falling today and now at 2.34%.

Oil prices are back up +US$1 today following the fall yesterday, now just under US$52.50 for the US benchmark, while the Brent benchmark is now just on US$55.50 a barrel.

The gold price is a little softer today, down -$2 from this time yesterday at US$1,187/oz.

The New Zealand dollar is marginally higher and now at 70.1 US¢. On the cross rates it is holding at 94.7 AU¢, and against the euro at 66.7 euro cents. The NZ TWI-5 index is at 76.5.

If you want to catch up with all the changes yesterday, we have an update here.

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

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21 Comments

'However, there are one main difference between the new movement spreading across the US and Europe in comparison to the struggling status quo. While still socialists, the new movement understand why the once affluent middle class of the western world are upset. They cannot make ends meet as they find themselves in a situation whereby the central bank target a domestic price level in a world where prices are set on global markets. To achieve a two per cent CPI target when import prices are falling due to the “China-factor”, it is given that non-tradable prices must grow far faster than two per cent. From this we can conclude that essentials, such as housing/rent, education, food and medical expenses will grow far faster than then aggregate CPI if the two per cent target is to be reached. Data from the Bureau of Labor Statistics substantiates this view.
http://bawerk.net/2016/12/17/a-new-world-order-part-iii/

quote is from part two which you can link to from part 3

AJ.... yes... I agree... and it seems like common sense ...which begs the question ...
Why does our Reserve Bank not see this and address the limitations of Inflation targeting in this Global world..??
Asset price inflation has been the direct consequence of unfettered credit growth .... for along time.

AND... with the nature of exponential growth curves... the disparities seem negligible early on , but over time they become extreme...

eg.. If we start with a jar which has 1 bacteria in it , and the bacteria doubles every minute... and the jar is full at 12 oclock... When was the jar only half full..??

If non tradable inflation is 4%/yr over time and wages go up only 2%/yr over time... it only becomes really problematic and noticeable over a long period of time..

If wages grow by 3%/yr but money supply grows by 7%/yr... what are the long term implications of this..??

11.59

If the money supply grows at 7-8% per annum and wages grow at 2.6-3% per annum you get asset price inflation with wealth transferring to the rich, and rapidly increase inequality. It certainly puts upward pressure on rents as well.

It appears that Auckland isn't the only place where the working class are struggling to pay rent. I had a look at Wellington CBD rents and they have gone up a lot in the past 2 years. It explains why I know so many people that have moved further away and it's only getting worse.

Thank you AJ, well worth a read of all three parts.

Why did this not create a political movement toward National Socialism decades ago? Simply because artificial dollar claims were still considered money good worldwide. An increasingly creative financial system, in no doubt cheered on by corrupt politicians, thus took the best and brightest and told them to create ever more dollar liabilities to satisfy world demand. The masses could thus leverage their balance sheet with ease as banks needed collateral to sell abroad. Until 2008 that is. From that point on it all came crashing down as dollar claims were suddenly deemed unsafe. Banks could no longer expand their balance sheet at will and therefore the households and business couldn’t either.

The real pain from a four-decade long boom was suddenly felt as the system moved away from its exponentially rising growth trend toward one allowed by a broken Eurodollar system.

The current shortage of global eurodollar liability creation confirmed by negative cross currency basis swaps quotes out of Europe, Japan and the UK has become an evident, but opposite feature in New Zealand and Australia.

The RBNZ is constantly, over recent months, intervening with fabricated, but sterlised NZD supply in the NZD/USD forward FX markets to lower persistently higher NZD interest rates implied by the forward pip quotes.

Why is there a shortage of NZD liquidity in the FX forward swap market that our four large Australian banks are unable to address? Balance sheet constraints imposed by the parents back home, foreign counterparty credits limits? Who knows? But we should.

Maybe they are on a planned failure path with NZ depositors to take a hair cut. How will I assess the risk to my deposits - take out a fixed rate mortgage!

Given 1yr forward mid pips imply a NZD interest rate ~ 2.75%, a full 100 bps higher than the OCR, something is expected by the international FX trading community that requires locking in higher risk adjusted returns today for the future.

I still suspect recapitalisation of the Australian banks is driving it. This would mean NZ banks have a tighter cash flow situation. Also if you're in an Australian corporate but in the NZ branch you will find the pressure goes on when they need to extract money so action will be expected.

If something else is going on then no one is talking about it.

What caused the NZD to spike to 0.708 around 7am?

USD weakness and President Trump.

Probably Trump's comments...which caused the US dollar to take a bit of a dive.

Yes but:
The Directors of Bellamy’s bring to the Board a variety of skills and experience, including industry and business knowledge, financial management and corporate governance experience.
And 3 of the 6 are women too! How could it all go so wrong?

The losers in all this are tax-paying renters, of course.

Yes, indeed.

The Obama administration cut mortgage-insurance premiums charged under a government program that’s popular with first-time home buyers with little money for a down payment, a move that may ease the burden of rising interest rates.

The annual fees the Federal Housing Administration charges to guarantee mortgages it backs are being cut by a quarter of a percentage point, the Department of Housing and Urban Development said in a statement on Monday. With the reduction, the annual cost for most borrowers will be 0.60 percent of the loan balance. Read more

Irrespective of where we all stand regarding Trump, it won't be a boring presidency, that's for sure.

It's not like CDOs have led to widespread fraud before, oh wait. It looks like some of those energy conscious loans are as large as some US mortgages but with higher interest rates. The US seems to like trying to blow up it's entire financial system while inflicting the damage on everyone.

AEP@Torygraph is reviving the 'painted into a corner' meme for central banks of all stripes: http://www.telegraph.co.uk/business/2017/01/11/perils-icarus-trade-world...

(Article paywalled in main section, not in Business, this may not last....)

Thanks Waymad, also the Telegraph is back allowing comments and my favourite commenter is back.

Jonathan Wilson 12 Jan 2017 1:10PM
Ambrose,

The type of growth that Trump is advocating is very different from a usual Keynesian approach to fiscal stimulus.

Typical Keynesian stimulus is to hose, either current or future, taxpayers money around with little regard to the output value of what is being spent. Consequently much of Keynesian spending is net consumption rather than any "investment" label that may be attached to it by politicians.

The proof?

Unsustainable boom and bust GDP growth matched by growing sovereign debt.

No, Trump is changing the nature of GDP growth from coercive, moral hazard prone, apparatchik 3rd party spending as the basis of so-called GDP growth, to reconnecting spending to those who actually engaged in the transactions that created the original wealth.

Who gets to spend the money, whether it is for risk bearing investment purposes or for consumption, matters in fundamental ways to the rate and sustainability of GDP growth.

Hence Trump's, 15% corporate tax rate, lower middle class tax rates, the bonfire of EPA regulations, reversing the state monopolizing of the US health services industry, lowing the cost of energy, etc, is the operationalization of the revolution in who gets to spend the money.

Trump is no Keynesian even though his economic plans may look like standard fiscal stimulus to the blinkered economist. Structurally, something much more fundamental is going to take place.

It is for this reason that you miscalculate the rate and size of new sustainable wealth creation that the US, with its strategic economic depth, is going to experience in short order.

The quality and size of future US economic growth is entirely underplayed in your analysis.

Jonathan

Michael Hartnett, the bank's investment strategist, says there will be a perfect moment for the 'Big Short' within a few months, but first we must all wait for the speculative fever to pass. The warning signs of a market top are not yet flashing red.

Picking the last pennies off tracks before an incoming train is only for the nimble and brave.

Big pennies!!!!!

Facebook, Amazon, Netflix and Google-parent Alphabet — the so-called Fang stocks — have collectively added $83.4bn to their market value over the first seven trading days this year. Read more

Parekowhai's sculpted state house on Auckland waterfront puzzles visitors
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11780918

Somebodies having a joke.
What was once built by the state for poor people, is now beyond the means of even professional people. That’s progress for you.

The people who commissioned it, probably don’t get it, they see the source of their fortunes. (The Chandeliers inside)

Behold the new sacred bull for New Zealanders to worship!

I like how people are getting angry about the artwork. It's doing its job if people feel emotion. The price is hilarious because it shows how badly broken housing is in NZ.