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Opinion: Market pricing a more accurate foreteller of economic fortune

Rural News
Opinion: Market pricing a more accurate foreteller of economic fortune

By Roger J Kerr

A good number of local economists continue to have a view that the NZ economy is really struggling and the media lap up their pessimism.

However, tellingly, the markets are signalling to us something completely the opposite about the current and future outlook for the NZ economy.

Consider the recent price action in the financial and investment markets:-

Foreign exchange market:
The NZD/USD propelled up to near post-1985 float highs of 0.8215 as news reports stated that Chinese sovereign wealth funds were allocating another $6 billion to invest into New Zealand. Whether the news was correct or not was of no matter as currency speculators rushed to buy the Kiwi before the Chinese did.

The popularity of New Zealand as an investment destination to meet their portfolio diversification needs is understandable with export prices and terms of trade at 30-year highs. The fundamentals of the NZ economy supplying protein to the massive urbanisation of Asia are very positive, and this is now being recognised by overseas investors with long-term investment horizons.

NZ Government bond market:
The considerable overseas investor demand for NZ Government bonds has driven the 10-year market yields down from 5.80% to 5.07% over recent months.

The Asian sovereign wealth funds do not hedge the NZ dollar denominated bond investments; that is, they just buy the Kiwi dollar to buy the bonds and happily take the currency risk while they hold the bonds. The Government’s budget two weeks ago alleviated any concerns about a credit-rating downgrade for New Zealand.

NZ equities market:
While not on a runaway boom, the NZ sharemarket has performed well over recent months with share investors clearly confident about earnings increases for listed companies in the current and future economic environment.

Artificially low interest rates here (like the US) do distort the performance of shares, as buying shares for dividend yield is more attractive than cash in the bank on deposit.

Wholemilk powder market:
Fonterra’s confirmation of $8.10kg milksolids payout for the season just ended and a generally higher than expected $7.15 to $7.25kg milksolids forecast for the 2011/2012 season ahead has to be seen as very positive for the NZ economy going forward.

Fonterra has confidence that the rise in international dairy prices over the past 12 months is sustainable.

The overall market pricing is signalling a strong economy and thus 4% plus GDP growth forecasts for next year have been given a tick as accurate and likely by the markets.

The RBNZ could be well advised to take note of these market price signals rather than relying solely on the housing market as their key lead-indicator for inflationary pressures.

As always, waiting for house prices to turn up before tightening monetary policy is a big mistake when the inflation risks are already increasing due to stronger than expected economic growth. There are signs already that farmers have started to spend again and even the OECD in their economic outlook for NZ last week see demand and spending picking up in the second half of 2011.

These markets tell me that the RBNZ and non-bank economists are underestimating future economic growth and are thus far too complacent on the future inflation threats.

Business firms who have had compressed profit margins over the last two years (due to higher input costs) will be very keen to recoup those lost profits when end-demand picks up and they can increase their prices. Higher wage settlements and higher KiwiSaver employer contributions are two of those increased input costs. Price-setting behaviour is about to change.
 
Three year fixed-rate money (three-year swap rates) at 3.80% looks startlingly and artificially cheap against this scenario of stronger growth and an annual inflation rate above 3.00%.

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16 Comments

Roger - given your view that we are heading into a high inflation high growth period - where would you be investing to best take advantage of this?

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Give Roger your money and pay the fees SK....fancy trying to get advice for nicks!

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Imagine asking the opinion of someone who may know something about the question.

Absolutely unprecedented on this site.

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Roger, thoroughly agree with you, the risks are hugely slanted to the upside, and not in the slightest priced into the markets currently - look out if it becomes so, but for the moment most will stay greedy and talk their book.

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The Economic and Monetary Affairs Committee of the European Parliament has approved gold to be used as collateral.

http://www.thedailycrux.com/content/7777/Gold

How much gold has NZ, just in case?

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White G\gold Gertraud, plenty of it

Good question though

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Roger's still living in fantasy land.

We will be lucky to have zero growth over 2011 (which of course means real GDP would still be well below the pre 2008 recession level).

By the way if Bollard is going to be waiting on the Christchurch rebuild to raise rates - expect them to be low till 2014!  After 9 months nothing's happened, the insurance companies are doing everything they can not to rebuild and I know of them having made cash settlements significantly above agreed policy terms to avoid having to meet full replacement obligations.

Rebuild - 0

Capital Flight -10

We know who's going to win this!  (Not the economy!)

A change of direction is needed NOW!

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Chris - haven't seen you commenting for while. Good to see you back. From what I hear from elsewhere I don't think you are far off the mark. As someone was telling me today, this isn't in, "the main caused by the earthquakes – but more because of the inept political management".

But what can be done?

Cheers, Les.  

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If we want to prevent that capital flight - then I wonder whether the only way to reverse it and fast is for central government to appropriate stable, vacant (or near vacant) land for an alternate CBD - and get the services in there quick smart.

 

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Kate - what would go into that alternate CBD? What would ChCh's CBD look like in say 10, 20 yrs time, if the eq had not have happened? Time, how is it relative?

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Not quite sure what you're asking, but I agree with ChrisJ - capital flight is happening now - time is money (in a literal sense for the CHCH economy).

I just got an email today informing me of two people who have been nominated to join whatever the name of the bureaucratic liason group they've set up down there.  And I thought - geez - these people don't even live down there.  And these well intentioned appointees were emailing their wider constituency (me included) to canvas our opinions and thoughts on what should happen in terms of the rebuilding/redesigning CHCH.

I thought, why should I get a say?  I don't live there.  I don't drive on the broken roads.  I don't suffer the indignities of living without proper sanitation.  I don't drive by places where people have perished.  I don't endure the aftershocks.  I'm not plugging cracks and gaps in my house in the middle of winter.  My income has not been affected by the disaster.  And so on.

I fear the rebuild could turn into a wider NZ consultation nightmare.

I'd have thought by now we'd have some idea whether the CBD subsoil should or should not be rebuilt on.  I suspect not.  So, do we want a big city down there or not?  And if we do then we have to find it more stable ground.  Then the owners of capital can build what they want.

  

 

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Chris_J

I wonder what people are doing with the money. Repaying debt?

Also interesting that there's still a 1 in 4 chance of another 7.0 quake in the next year.

http://www.stuff.co.nz/the-press/news/christchurch-earthquake-2011/5076169/Big-quake-risk-put-at-23-per-cent

Best wishes from here Chris

chers

Bernard

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Bernard, yes debt repayment is what people are doing.  I expect lots of deleveraging and no rebuilding.  So it's possibly fundamentally good for the economy ... in the long term.

Don't expect a ChCh rebuild because the Govenment is intent on talking to the wrong people.  The insured (property owners) are the ones with the money to spend, not the gpvenment, not construction mafia (Fletchers), not "business leaders".

Like always, those in authority are unfortunately backwards and, for want of a better word, stupid (much like Dilbert's pointy haired friend!)

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I have advised on quite a few cash settlements like Chis mentions, my real concern is the duration of  seismic activity is going to hamper rebuilding of people and buildings regardless, look at the scientific evidence, the reports that are out there, they are only talking twelve month timelines in the media...hmm. Many people are not going to last this, I understand the MOH and MSD are dedicating resources to the middle class where they expect the mental health issues to arise.

 

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I welcome any evidence people are seeing on these cash settlements from the insurance companies.

cheers

Bernard

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Well client confidentiality does not allow me to give your specific case details, so what evidence are you specfically seeking?

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