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Bernard's Top 10:How Big Brother is credit scoring you; World more indebted than 2007 and China leads the way; Aetna copies Henry Ford; Tony Abbott's real (big) problems; Clarke and Dawe

Bernard's Top 10:How Big Brother is credit scoring you; World more indebted than 2007 and China leads the way; Aetna copies Henry Ford; Tony Abbott's real (big) problems; Clarke and Dawe

Here's my Top 10 items from around the Internet over the last week or so. As always, we welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz

See all previous Top 10s here.

My must read is #1 on the new algorithims used for credit checks and how they could entrench poverty.

1. Digital red lines - New Zealand is slowly joining the world of credit scoring whereby all sorts of data is used to work out if someone can repay a loan, including 'positive' data on things like how quickly you pay the bill, where you live, what you buy and all sorts of tangential things.

In America questions are being asked about the mountain of data and the very clever algorithims being used to classify people, often by association.

It raises all sorts of big questions around race, class and social mobility.

What if you could never get a loan to buy a house or start a business because you live in the wrong neighbourhood, or because your parents or brothers or sisters have a bad credit record?

It starts to 'lock in' disaparities of wealth and income in a quite insidious way.

Here's Tracy Alloway with a piece on big data for big credit. It worries about the entrenching of poverty.

It's thought provoking in many ways. We're just really starting down this track.

While US law forbids the discrimination of borrowers based on factors such as gender or race, parsing publicly available information on social networks such as Facebook and Twitter has been shown capable of accurately predicting everything from users’ political inclination to ethnicity and sexual orientation.

Chief among critics’ concerns is the ability to use new types of data and computerised algorthims to build “proxies” that do not overtly discriminate on the basis of factors such as race or gender, but may use correlated information to build an in-depth profile of a particular customer.

“Now you have data, you can predict anything,” says Max Gasner, founder of One Financial, a retail financial services start-up. “You can use your Facebook and Twitter data to tell what race you are, whether you’re gay or straight. You can predict a lot of stuff that’s illegal to use for lending and you can also more finely discriminate.”

2. Entrenching wealth - The Barfoot and Thompson survey released over the weekend to coincide with the start of the 'Our First Home' reality TV series shows the percentage of first home buyers who have to get parental help is up to 47% from just 13% in the 1970s.

This is another mechanism through which wealth is determined dynastically, rather than through some sort of egalitarian way. This is very different from the days when a state house boy could lift himself up through education and a spring off a strong social net into financial security and wealth.

The Property Institute is blaming the Reserve Bank's high LVR speed limit for this.

There is plenty of blame to share around, but the combination of highly leveraged mortgage lending, no capital gains taxes, NIMBY-driven council planning rules and unfettered net migration has led to obscenely over-valued housing.

Property Institute chief executive Ashley Church said loan-to-value restrictions had made "not a jot" of difference to house prices, but had badly affected young people's chances of buying a home.

"What we've now done is we've basically said unless you're in the fortuitous position where you have the ability to fund that deposit through some other means . . . in this case your parents or some other party, then basically you can't get into the market.

"All we've done is move the problem from one area to another and in doing so we've created a two-tier buying society."

3. The Good Jobs Strategy - James Surowiecki writes well at The New Yorker on growing signs from even the biggest businesses in America that they need to pay their workers more to save capitalism.

There's some good hard-headed business logic to it as well.

Last month, Aetna’s C.E.O., Mark Bertolini, announced that the company’s lowest-paid workers would get a substantial raise—from twelve to sixteen dollars an hour, in some cases—as well as improved medical coverage. Bertolini didn’t stop there. He said that it was not “fair” for employees of a Fortune 50 company to be struggling to make ends meet. He explicitly linked the decision to the broader debate about inequality, mentioning that he had given copies of Thomas Piketty’s “Capital in the Twenty-first Century” to all his top executives.

“Companies are not just money-making machines,” he told me last week. “For the good of the social order, these are the kinds of investments we should be willing to make.”

4. Show us the money - Surowiecki also points to fresh research out of MIT showing that paying higher wages actually makes financial sense.

A substantial body of research suggests that it can make sense to pay above-market wages—economists call them “efficiency wages.” If you pay people better, they are more likely to stay, which saves money; job turnover was costing Aetna a hundred and twenty million dollars a year. Better-paid employees tend to work harder, too. The most famous example in business history is Henry Ford’s decision, in 1914, to start paying his workers the then handsome sum of five dollars a day. Working on the Model T assembly line was an unpleasant job. Workers had been quitting in huge numbers or simply not showing up for work. Once Ford started paying better, job turnover and absenteeism plummeted, and productivity and profits rose.

Subsequent research has borne out the wisdom of Ford’s approach. As the authors of a just published study of pay and performance in a hotel chain wrote, “Increases in wages do, in fact, pay for themselves.” Zeynep Ton, a business-school professor at M.I.T., shows in her recent book, “The Good Jobs Strategy,” that one of the reasons retailers like Trader Joe’s and Costco have flourished is that, instead of relentlessly cost-cutting, they pay their employees relatively well, invest heavily in training them, and design their operations to encourage employee initiative.

Their upfront labor costs may be higher, but, as Ton told me, “these companies end up with motivated, capable workers, better service, and increased sales.” Bertolini—who, as it happens, once worked on a Ford rear-axle assembly line—makes a similar argument. “It’s hard for people to be fully engaged with customers when they’re worrying about how to put food on the table,” he told me. “So I don’t buy the idea that paying people well means sacrificing short-term earnings.”

5. More debt? No worries? - McKinsey has produced a report showing the world is now more indebted than it was in 2007 and China in particular is now more indebted relative to the size of its economy than America was before the GFC. Of course, it's all fine as long as interest rates stay amazingly low forever... That could well happen. Tra la la la la....

Seven years after the bursting of a global credit bubble resulted in the worst financial crisis since the Great Depression, debt continues to grow. In fact, rather than reducing indebtedness, or deleveraging, all major economies today have higher levels of borrowing relative to GDP than they did in 2007. Global debt in these years has grown by $57 trillion, raising the ratio of debt to GDP by 17 percentage points (Exhibit 1). That poses new risks to financial stability and may undermine global economic growth.

Fueled by real estate and shadow banking, China’s total debt has nearly quadrupled, rising to $28 trillion by mid-2014, from $7 trillion in 2007. At 282 percent of GDP, China’s debt as a share of GDP, while manageable, is larger than that of the United States or Germany. Three developments are potentially worrisome: half of all loans are linked, directly or indirectly, to China’s overheated real-estate market; unregulated shadow banking accounts for nearly half of new lending; and the debt of many local governments is probably unsustainable. However, MGI calculates that China’s government has the capacity to bail out the financial sector should a property-related debt crisis develop. The challenge will be to contain future debt increases and reduce the risks of such a crisis, without putting the brakes on economic growth.

6. LVR limits - One of the tools that McKinsey advocates is tougher limits on bank leverage. Fair enough.

These challenges need to be addressed. Yet if, as it appears, economies need ever-larger amounts of debt to grow, and deleveraging is rare and increasingly difficult, they may also need to learn to live more safely with high debt. That will require new approaches to manage and monitor it, to reduce the risk of crises, and to resolve private-sector defaults efficiently. Policy makers will need to consider more ways to reduce government debt, and it may be time to reevaluate how incentives in the tax system encourage the amassing of debt. When there are signs of credit bubbles, regulators can seek to cool markets with countercyclical measures, such as tighter loan-to-value rules and higher capital requirements for banks. Debt undoubtedly remains an essential tool for financing economic growth. But how it is created, used, monitored, and (when necessary) discharged still needs improvement.

7. Hey Tony - Tony Abbott has a few problems at the moment. This is one he may not worry about too much at the moment, but perhaps he should. Australia's households have too much debt, according to McKinsey. The only reason New Zealand seems to have been ignored in the report is we were too small to include. New Zealand's houshold debt to income ratio is around the same as the problem countries identified in the report, although it's no worse than in 2007 (albeit rising). In the chart below we would be nestled in between Australia and Sweden.

Household debt is reaching new peaks. Only in the core crisis countries—Ireland, Spain, the United Kingdom, and the United States—have households deleveraged. In many others, household debt-to-income ratios have continued to rise. They exceed the peak levels in the crisis countries before 2008 in some cases, including such advanced economies as Australia, Canada, Denmark, Sweden, and the Netherlands, as well as Malaysia, South Korea, and Thailand.

These countries want to avoid property-related debt crises like those of 2008. To manage high levels of household debt safely, they need more flexible mortgage contracts, clearer personal-bankruptcy rules, and tighter lending standards and macroprudential rules.

8. Hey Tony - Aside from the household debt issue, Australia faces an iron ore price below US$40 a tonne, says Andy Xie. Crikey. I wonder what a US$40/tonne iron ore price would do to Australia's unemployment rate and household debt ratios. And housing market. Not to mention New Zealand's net migration rate.

“We have a situation of declining demand and increasing supply,” said Xie, who also worked for the World Bank. “Domestic steel demand in China is actually declining and that trend is going to last a long time.”

In 2014, China’s steel production was little changed as local demand fell and exports rose. Domestic consumption dropped 3.4 percent to 738.3 million tons, the China Iron & Steel Association said on its website Jan. 22. Crude steel-output rose 0.9 percent, the weakest growth in at least 24 years, data from the statistics bureau showed. Exports jumped 51 percent to a record 93.8 million tons.

“Steel output is still up marginally, but minus export growth, domestic demand actually fell,” said Xie, who forecast that some steel plants and high-cost iron ore in mines in China will be closed as the world’s biggest miners expand further.

 

9. Currency wars - Hard on the heels of Europe's money printing, Japan's big new money printing and China's fresh easing of monetary policy, Simon Kennedy writes here about an undeclared war in currency markets.

“There is a growing consensus in the market that an unspoken currency war has broken out,” he said in a report to clients this week. “The reason why this is a war is that it is ultimately a zero-sum game -- someone gains only because someone else will lose.”

Little tip. The ones who lose are the ones who just sit in the middle of the battlefield doing nothing.

Bloomberg looks at China's latest easing and says much more is to come:

China’s latest move in the global monetary-easing game may be just the start. Economists from Deutsche Bank AG, Bank of America Corp. and Nomura Holdings Inc. are among those forecasting more cuts to reserve requirements and benchmark interest rates after the People’s Bank of China said Wednesday it’s lowering lenders’ reserve ratio by 50 basis points. That move may inject about 600 billion yuan ($96 billion) into the economy.

Unlike its biggest peers, the PBOC has plenty more ammunition. Even after the reduction, China’s biggest banks will still have to keep 19.5 percent of deposits locked up. The one-year lending rate is 5.6 percent -- a long way from the zero bound that forced the Federal Reserve, Bank of Japan and now the European Central Bank into quantitative easing.

10. Totally Clarke and Dawe with 'Tones' the duck. He quacks and waddles. A lot.

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8 Comments

9. Currency wars.

"Little tip. The ones who lose are the ones who just sit in the middle of the battlefield doing nothing."

 

Just can't think who you mean...don't worry JK will save as with BAU and standard pre 2007 doctrice.

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Indeed, in just about every war its the civilians/innocent that die/lose the most.

 

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Indeed, I sense NZ is not doing much. Having said that I would not advocate what the Aussies are trying- apparent incompetence on the part of the Liberals seems to be getting their dollar down. There was also a suggestion earlier in the week that the RBNZ is leaning on the commercial banks to source more their funds from local sources including term deposits. If true, that keeps away foreign capital then that is participation in the currency wars to some extent, and may help explain the current account not blowing out so far as much as a very overvalued exchange rate would normally suggest.

 

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#8
Today Bernard Hickey clearly shows what happens to prices when demand declines or disappears

 

compare - in a housing context

 

Gareth Morgan argues Demand Side solutions - 30 January 2015
http://www.interest.co.nz/opinion/73795/while-politicans-go-chasing-ghosts-you-should-do-i-do-%E2%80%93-buy-lots-houses-and-farms-says

 

Two days later on 1 February 2015
Bernard Hickey argues Supply Side solutions
What would Lee Kwan Yew do?
http://www.interest.co.nz/opinion/73790/bernard-hickey-questions-timidity-governments-social-housing-plans-he-suggests-mr-key-

 

Is it time for a head-to-head debate with Bernard Hickey and Gareth Morgan?

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A double shot interviwew?

Now that would rock.

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That image in Gareth Morgan's article of a high rise apartment building sitting on top of One-Tree-Hill is a very powerful message to Auckland and Aucklanders. While it might not get up, it demonstrates what is happening in Auckland and elsewhere

 

The following news item of what has happened in Melbourne is a wake-up call. Population density is double what is allowed in Hong Kong and New York, and that is happening not too far away from Auckland

 

Population Densities

Melbourne 6200 per hectare
Hong Kong 2600 per hectare
New York  2500 per hectare
Vancouver 1300 per hectare

 

It is happening - see news item

http://www.msn.com/en-au/sport/other/melbourne-high-rises-exceeding-sta…

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DP

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You had me worried there for a minute, before I saw in the article that it's the population density in the high rise apartments that's 6200 per hectare, not in the city overall.

Still a bit scary though!

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