The Reserve Bank's own calculations show core NZ-generated inflation running at 3.5%, well above the top of the central bank's target range

Very true - these stupid reckless ultra-loose monetary policies have only benefited a parasitic minority of self-serving housing speculators.

And now the whole of NZ will have to pay the price for it - with the RBNZ forced play catch-up and to tighten monetary conditions much more aggressively than otherwise would have been necessary, therefore punishing the real economy and productive people too. You did not need to be a financial Nostradamus to foresee it - and I have been saying this for almost 2 years now. The incompetence demonstrated by the RBNZ has been eye-watering, and of extreme negligence.

Well, at least if this tightening of monetary conditions has the effect of bursting the housing bubble and finally kicking a few housing specuvestors out of the market, I will not lose any sleep on it for sure.   

I wonder if Orr reads this site, or checks out the comments.

I think that it was pretty obvious by Nov/Dec 2020 and I posted several times on this site predicting the mess that we are now facing.

The Wealth is The Denominator

Among the illusions encouraged by every speculative bubble is the idea that wealth is embodied in the prices of securities – that higher prices inherently represent greater “wealth.” The fact is that every security is, at base, a claim to some future stream of cash flows that will be delivered into the hands of investors over time. The wealth is in those cash flows. Yes, any individual can obtain the market price of a security by selling it to someone else, but the buyer, and ultimately the whole string of people who own the security until it is retired – ultimately has a claim on only one thing: the cash flows that the security will deliver over time. That’s where the wealth is. Every other transaction is simply a transfer of wealth between a buyer and a seller. At extreme valuations, that transfer typically favors the seller. At depressed valuations, that transfer typically favors the buyer.

When the prices of securities become extreme relative to their underlying fundamentals – the revenues, GDP or other economic engines that generate deliverable cash flows – there’s only one way to bring the ratio of price to fundamentals back into line, and that is for prices to grow at a slower rate than fundamentals do.

In general, that implies a long period of dull or negative investment returns.

What about rapid growth in fundamentals? Well, over the past two decades, S&P 500 revenues and U.S. nominal GDP have grown at just 4% annually. Unless profit margins expand indefinitely from already-record highs, that’s the baseline for nominal growth. There are two ways to bump that up: higher real growth, or higher inflation. Given that real structural U.S. GDP growth (the sum of demographic labor force growth and trend productivity) has gradually declined over the past three decades to only about 1.6% annually, real GDP growth is unlikely to meaningfully contribute to the realignment. It’s certainly possible for inflation to drive nominal fundamentals higher (in which case investors could still expect negative real returns), but as we’ll discuss below, inflation-driven growth tends to benefit nominal stock market returns only after valuations have been crushed. At present, the CPI would have to roughly triple before the “benefit” of inflation would offset the drag of extreme valuations.

For the S&P 500, we expect a long period of negative returns, both real and nominal, but with more than enough volatility to provide regular opportunities for a value-conscious, full-cycle investment discipline. What makes this cycle “different” from previous cycles is not that valuations don’t matter (they do, and will), but that Fed-induced speculation has not been constrained by historically-reliable “limits” that were useful in previous cycles. So we’ve adapted, to tolerate and even thrive in a world where even Fed-induced speculation without “limits” can still be gauged by the level of valuations and the condition of market internals.

What investors view as “wealth” is actually just the current price of their future wealth. Except for individual investors who sell into the extreme valuations that are periodically offered by Mr. Market, those prices are just blotches of ink on paper and flashing pixels on a screen. For long-term investors, the wealth is in the cash flows, and those cash flows are in the denominator. When you divide the market capitalization of the liabilities (the market value of stocks or debt) by the value-added production that generates the cash flows (GDP or corporate gross value-added), you get a useful picture of the extent to which investors are likely to enjoy outstanding long-term returns or dismal ones. Indeed, as I’ve often detailed, valuation measures based on these comparisons are also the ones best correlated with actual subsequent market returns.

At present, that picture has never been more extreme. The chart below shows the sum of equity market capitalization and debt for U.S. nonfinancial firms, divided by the gross value-added (essentially revenues) of those firms.

I know. But have (your) purchases gone up by 4.9% or 2.7% - IF those figures, in themselves, can be believed at all?

Around 90% of the money supply is credit money loaned by banks to consumers and businesses and around 10% is from Govt spending. Thus the money supply is primarily driven by people appetite to borrow and ability to pay back. More importantly, saying that money supply leads to inflation is seriously flawed. If you are up for finding out why... https://www.forbes.com/sites/johntharvey/2011/05/14/money-growth-does-n…