David Chaston on unfair tax on gains; the changing workforce; China's bubble and stimulus, jobless youth; NZ's bubble; KiwiSaver risk; student debt; Dilbert & more

Here's my edition of Top 10 links from around the Internet today.

It's charts, charts and more charts today.

We have a Monday-Wednesday-Friday schedule for Top 10. Bernard will be back with his version this Wednesday. We will have another guest posting on Friday.

As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz.

See all previous Top 10s here.

1. Hard, but a policy change we must have
We start today with an NZIER chart that explains exactly how the housing distortion works, and why we just have to have taxes on all gains without exempting housing.

The only difference between these two examples is tax.

I suspect starting out taxing gains on the family house is too hard politically, but surely we can start with landlord's untaxed gains? That would not only level the playing field, it would rid us of those odious "specialist investment property service" spruikers, which are aimed at the naive.

Once that is bedded in, then the 'second house/holiday house' could lose its exemption.

And then ...

2. The workforce is changing
Here is a chart that frightens many people. They see it as a look into "our future". It tracks Japan's 'working age population' for ages 15-64 and that has fallen from about 87 mln in 1995 to just 77 mln twenty years later. The decline looks frightening, more so in Japan's case because female participation in the workforce is low.

But is this really New Zealand's future? Personally I doubt it.

I am outside the charted demographic, but still working. I (and probably you) know many many people like that. Like many of them, I don't need to, but choose to. But the demographers seem stuck in definitions of twenty years ago. Time for them to get a bit more realistic.

Last week's HLFS revealed there are now almost 130,000 people working who are over 65, about a 21% participation rate, and they have a remarkably low 1% unemployment rate. These are all record highs. True, some will need to but that has always been the case. The extra people working will likely be by choice; at least that is my opinion.

In fact, in New Zealand there are now 84,000 people working who are between 65 and 70, up from just 34,000 ten years ago.

I think it is time we stopped obsessing about "what Japan signals". This chart is not about New Zealand, no matter how many times it gets published.

3. A bubble ready to pop?
China’s housing market is in a slump, and it might be too late for the government to do anything about it. The country relies heavily on property to prop up economic growth, and a slowdown of the world economy’s most important growth engine will be felt acutely, especially in commodity markets. This chart is from Quartz.com :

4. Don't call it stimulus
In the past 21 days, China's National Development and Reform Commission has approved building 16 rail lines and five airports, for an all-up spend of almost NZ$150 bln. You will need Google Translate to read the article here announcing the projects, but that is a lot of sudden spending on infrastructure.

Might have something to do with the chart above ...

Apologies to fluent Mandarin readers, but this is part of what Google Translate came up with in its raw fractured state; but you get the drift:

"The current economic downward pressure, the government began to emphasize the apparent steady growth, the railway infrastructure are accelerating, shrinking to hedge real estate and private sector investment." Minsheng Securities research vice president, chief macroeconomic researcher tube Kiyotomo WASHINGTON reporter on said the real estate investment long cycle weaker overcapacity situation has not been fundamentally alleviated investment within manufacturing raw power shortage, economic stabilization and to rely on infrastructure investment lifts.

Guo Lei pointed out that the field of railway infrastructure is not there is excess capacity, and also a wide range of industrial chain pulling effect, the field is expected to accelerate infrastructure investment will generate stimulating effect on the economy in 4-6 months after the end of the first quarter of next year the economy or You can feel the power of the current round of changes in the demand side.

It is worth noting that this round of approval of a majority of railway construction projects located in central and western regions, which is also this year's April 2 executive meeting of the State Council's "speed up railway construction railway particularly in the Midwest," the spirit of the same strain.

5. Not what it seems
Nothing gets a good headline like youth unemployment levels. As we got the September quarter data last week, I took a look again at this number and it was high again at 19.3%. That is, 24,800 people aged 15 to 19 were unemployed. I have made the point before that as soon as this age group grows up, its unemployment rate drops back to normal. Five years ago when those in the 20-24 year old group were teenagers, they had a youth unemployment rate of 25.1% whereas today that same group has an unemployment rate of 10.3%. Ten years ago, teenagers had a 12.2% unemployment rate and this same group today has an unemployment rate of just 6.5%.

The reason teenagers 'suffer' high unemployment is more than lack of opportunity. It is also because more and more of them are in education or training so the few left not in employment, education or training (NEET) are a smaller and smaller subset of more difficult-to-employ people. That makes for a fancy headline, but not much else. Its a social issue more than an employment opportunity issue

If we applied the participation rate to this group at the rate it will be after they have finished education and training (25-29 yrs), then you get the adjusted red line in the chart above, and that is not so scary.

If we also look at the whole sweep of that age group, you can see the actual number of unemployed has actually changed very little. It is the same today as it was 30 years ago at about 25,000 unemployed. Less are 'employed' in this age band. But there are many more in training and employment. We have made good progress I would argue and continue to do so. This progress, especially among females, has given us an overall participation rate the envy of the developed world.

6. Our turn soon?
When observers look at world housing markets, this next chart is what they see.

You don’t have to look too far back in the financial history books to find episodes in which real estate bubbles ended badly. Japan. Sweden. Spain. Ireland. And, the mother of them all, the US.

Some are worried that Canada could be careening down a similar path (followed by New Zealand). Sure, there are differences. Our banks seem to be on a relatively solid footing. And the structure of the NZ mortgage market -home loans are full-recourse - might prevent a drastic surge in defaults US-style. (That is, the borrower takes severe pain before the bank does.) Still, it does make you wonder. No doubt we are in a bubble.

7. Good advice?
If you think there are parts of the Auckland housing market that are pretty frothy, you won't get any argument from me. But it must be catching. Analysts at UBS have recently pointed out that the NZX price/earnings ratios are pretty frothy too.

The S&P500 and the Dow30 are at record levels, but the NZX has even higher PE multiples, and they are now a long way above their long-run averages.

Let's hope KiwiSaver fund managers are not expecting them to keep rising. A fall is in the offing, methinks. Most kiwis are exposed to this risk via their KiwiSaver funds, so if that is you, be warned.

Still, having noted that, UBS has only four of the forty stocks in their holdings as a 'sell' (Spark, Trade Me, Ryman, and SkyTV) while they have 16 rated as a 'buy'.

8. Wobbly giants (becoming dwarfs)
Another eye-popping chart, this one also from Quartz. The finances of Argentina and Venezuela, respectively the second- and third-largest economies in South America, are once again in shambles.

Argentina notched its second default in 13 years in July, when it failed to make a $539 interest payment to creditors. (That was part of a long, complicated fight with creditors.)

Meanwhile, doubts about credit-worthiness have increasingly hovered over Venezuela, where surging inflation and price controls are leading to shortages and rationing.

If you owned $10 mln in Venezuelan bonds would you spend $2 mln insuring them? Good money after bad, I would think.

Defaulting on debt is not a good thing to do, even for sovereign states. WDKHLWE.

9. Changing behaviour?
Here's another eye-catching chart from America. Students there now owe US$1.1 tln in student debt. This horrifies observers.

In New Zealand students and ex-students owe NZ$14.2 bln.

Rough back-of-the-envelope calculations based solely on a population basis (317 mln vs 4.5 mln), the comparative number if-the-US-was-NZ is that the US would have NZ$20.1 bln. So the US has 42% more student debt, per capita, than NZ. But given they have always had formal student borrowing and we only really started in 1992 perhaps the gap is not as wide as you might have expected.

And this isn’t all bad news - more people are in now study, which is a good thing.  See #5 above.

But some economists suggest that the burden of student debt is reshaping the spending patterns of younger people, prompting them to put off buying houses, cars, and much else besides.

10. Market volatility
A frightened investor goes to his financial planner and asks if he’s at all worried about the volatility of the markets these days.  The planner replies that he sure does! In fact, he says that he sleeps like a baby. The frightened investor was amazed!  "Really? Even with all the fluctuations?" "Yup! I sleep for a couple of hours, and then I wake up and I cry for a couple of hours."