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US data improves; UST yields rise with breakeven rates; another Chinese developer defaults; East Asian data weakens; magnesium price drops; UST 10yr 1.62%, oil firm and gold soft; NZ$1 = 71.6 USc; TWI-5 = 75.1

Business / news
US data improves; UST yields rise with breakeven rates; another Chinese developer defaults; East Asian data weakens; magnesium price drops; UST 10yr 1.62%, oil firm and gold soft; NZ$1 = 71.6 USc; TWI-5 = 75.1

Here's our summary of key economic events overnight that affect New Zealand with news that the bond market is sending 'clear signals' that much higher inflation is here to stay.

But first in the US, new home sales picked up more than expected in September and are now running at an annual rate of +800,000 which is +17% above the annual rate in August, but miles below the 971,000 rate of sales in September 2020.

The US Conference Board measure of consumer confidence rose in October when analysts were expecting another lower result. But consumer expectations remain low even if they think the present situation for them is actually quite good.

The Richmond Fed factory survey in their Mid-Atlantic states came in much better in October than for September. It is yet another survey that features good new order flows, rising backlogs, and prices jumping at near extreme levels (+13%). The surveyed firms do expect the pricing pressure to ease, but to levels that would have sent warning bells at an earlier time (+6%).

And we should note that there was another big US Treasury bond auction overnight, this one for the two year maturity. US$167 bln was offered for the US$67 available (the Fed took US$6 bln). This was well above the US$144 bln in demand at the prior equivalent auction. But despite the demand, yields rose. Today's bond yielded 0.44% median, whereas at the prior event last month it was 0.28% pa.

And we should also note that the US "five year break even inflation rate" is now touching 3%, the first time it has done that since 2005. Essentially, it is signaling that the bond market is betting inflation is here to stay - it isn't going to be transitory. Similar signals are coming from European markets.

In China, the next shoe dropped late yesterday in the "Evergrande" saga. Rival Modern Land failed to repay a US$250 mln bond "due to unexpected liquidity issues". Modern Land is based in Beijing, but listed on the HKSE.

Over the past week, the Chinese central bank has added ¥700 bln (NZ$150 bln) in short term liquidity into their banking system, probably because of the property sector woes.

Yesterday, South Korea reported their economic expansion ran at a 4.0% annual rate in Q3, and that was sharply lower than the +6.0% rate in Q2-2021. This latest data is actually their weakest expansion rate since the depths of the Q2-2020 pandemic contraction.

Likewise, Singapore reported very disappointing industrial production data for September. A slowdown was expected, but not the contraction they ended up with.

Completing the disappointing regional data, Hong Kong exports rose slower in September than expected, and import growth didn't retreat nearly as much, leaving them with a wider trade deficit. They too are importing inflation.

In the metals world, we should note that the fast jump in the magnesium price is easing almost as quickly as it rose. Recovering Chinese smelter production is behind the improvement, although prices are not expected to return all the way back to prior levels.

In Australia Delta cases in Victoria have risen to 1510 cases reported there today, and so more improvement again. There are now 24,715 active cases in the state and there were another 4 deaths yesterday. In NSW there were another 284 new community cases reported today with 4,388 active locally acquired cases which is lower, and they also had 4 deaths yesterday. Queensland is reporting no new cases. The ACT has 12 new cases. Overall in Australia, more than 73% of eligible Aussies are fully vaccinated, plus 13% have now had one shot so far.

On Wall Street, the S&P500 has started their Tuesday session +0.2% firmer and at a new record high level. Overnight, European markets were all up +0.8% except Frankfurt which gained more than +1.0%. Yesterday, Tokyo closed up a very strong +1.8%, but Hong Kong ended down -0.4%, and Shanghai ended down -0.3%. The ASX200 ended unchanged while the NZX50 was down -0.1%.

The UST 10yr yield opens today down -2 bps to 1.62%. The US 2-10 rate curve is flatter today at +117 bps. Their 1-5 curve is unchanged at +106 bps, while their 3m-10 year curve is little-changed at +157 bps. The Australian Govt ten year benchmark rate is +4 bps firmer at 1.80%. The China Govt ten year bond is unchanged at 3.00%. The New Zealand Govt ten year is up +2 bps at 2.46%.

The price of gold has fallen back today by -US$15 to US$1792/oz.

And oil prices are up +US$1 to just under US$84.50/bbl in the US, while the international Brent price is up less, now just over US$85.50/bbl.

The Kiwi dollar opens today little-changed at 71.6 US. Against the Australian dollar we are a fraction softer at 95.5 AUc. Against the euro we are a fraction firmer at 61.8 euro cents. That means our TWI-5 starts today still at just on 75.1, but still well over the top of the 72-74 range of the past eleven months.

The bitcoin price is lower by -2.6% since this time yesterday, and now at US$62,001. Volatility over the past 24 hours has been modest at just over +/-1.5%.

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

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62 Comments

'One of the items that has had almost no attention is the huge losses that have resulted from the Reserve Bank’s Large Scale Asset Purchase (LSAP) programme. I guess it is a bit harder to report on, since neither the Bank nor the government puts out press releases boasting of losing $4bn or so.'

https://croakingcassandra.com/2021/10/26/massive-losses-for-nothing/#co…

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Are they losses or is this the QE (some call it "money printing") carried out by the Government?

If that's the case then they are not "losses", at least not in the normal sense of the word, and I suggest that to use that word is only to get a reaction. But if it is the funds supplied through COVID then there are obligations that come from it for the Government, which include where it is spent, what it achieved and what the economic benefit was. Fundamentally though if in the end it only went to pad bank profits and prop up or boost the housing market, then the net effect would be a loss for the country.

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Government’s balance sheet rescued  by vastly increased value of  property they own. That’s a double edged sword. How exactly do they cash that up? In other words where & what exactly is the market?

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What?!

You mean the Governments' Balance Sheets are as reliant upon the ever continued rise in Asset Prices as every Household Balance Sheet is, and not the productive application of work effort?

Shock, Horror.....

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Reminds me of the Freezing Industry. Year after year companies would rack up the value of works etc  to prop up the balance sheet, as fixed assets in old terminology. Yet in the 80’s and on, some were sold off to a rival for a $1 nominal to close ‘em down. Many more were just shut down, left to dot & rot  the landscape with polluted worthless old monstrosities. Big holes in balance sheets then, big departures from the industry too.

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Does that mean Deputy Governor Geoff Bascand is about to fail upwards?

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A billion here, a billion there.  Pretty soon, it adds up to Real Munny.....

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This is a balance sheet loss - resulting from a drop in the value of the Govt bonds owned by RBNZ (as part of QE / LSAP). I would question why this loss figure is presented as gross given that Govt will be saving around $1.4bn per year in interest payments (3% minus the OCR rate paid on settlement costs). LSAP also held interest rates down - reducing the interest payable on bonds issued throughout 2020 and early 2021. It is far from clear that Govt will face a net loss as a result of LSAP.

That said, Michael, who is incredibly knowledgeable on operations, is spot on that Govt should have done QE differently (using short term 3-month securities etc). He may not enjoy the comparison but Warren Mosler is of exactly the same view (although he advocates stopping long-term securities altogether.         

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I would question why this loss figure is presented as gross given that Govt will be saving around $1.4bn per year in interest payments (3% minus the OCR rate paid on settlement costs). LSAP also held interest rates down - reducing the interest payable on bonds issued throughout 2020 and early 2021. It is far from clear that Govt will face a net loss as a result of LSAP.

The real loss to society is the failure of the so called QE related portfolio balance channel to achieve anything but significant leveraged bank credit extension to residential property.

Promoting land banking has raised our business cost base for no discernible real wealth gains. 

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I would argue that it was low interest rates (scaffolded by QE) that drove bank credit into residential property. Blame the low OCR for that. The channel from QE to the share price bubble is much clearer as cash-rich investors looked for alternatives to securities.

Note that the net financial worth of households went up by about the same amount as property wealth over the last two years (a cool $400bn each). 

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Note that the net financial worth of households went up by about the same amount as property wealth over the last two years (a cool $400bn each). 

The rentier resurgence and takeover: Finance Capitalism vs. Industrial Capitalism

Marx and many of his less radical contemporary reformers saw the historical role of industrial capitalism as being to clear away the legacy of feudalism – the landlords, bankers and monopolists extracting economic rent without producing real value. But that reform movement failed. Today, the Finance, Insurance and Real Estate (FIRE) sector has regained control of government, creating neo-rentier economies.

The aim of this post-industrial finance capitalism is the opposite of that of industrial capitalism as known to 19th-century economists: It seeks wealth primarily through the extraction of economic rent, not industrial capital formation. Tax favoritism for real estate, privatization of oil and mineral extraction, banking and infrastructure monopolies add to the cost of living and doing business. Labor is being exploited increasingly by bank debt, student debt, credit-card debt, while housing and other prices are inflated on credit, leaving less income to spend on goods and services as economies suffer debt deflation.

Today’s New Cold War is a fight to internationalize this rentier capitalism by globally privatizing and financializing transportation, education, health care, prisons and policing, the post office and communications, and other sectors that formerly were kept in the public domain of European and American economies so as to keep their costs low and minimize their cost structure.

In the Western economies such privatizations have reversed the drive of industrial capitalism to minimize socially unnecessary costs of production and distribution. In addition to monopoly prices for privatized services, financial managers are cannibalizing industry by debt leveraging and high dividend payouts to increase stock prices.

* * *

Today’s neo-rentier economies obtain wealth mainly by rent seeking, while financialization capitalizes real estate and monopoly rent into bank loans, stocks and bonds. Debt leveraging to bid up prices and create capital gains on credit for this “virtual wealth” has been fueled by central bank Quantitative Easing since 2009.

Financial engineering is replacing industrial engineering. Over 90 percent of recent U.S. corporate income has been earmarked to raise the companies’ stock prices by being paid out as dividends to stockholders or spent on stock buyback programs. Many companies even borrow to buy up their own shares, raising their debt/equity ratios.

Households and industry are becoming debt-strapped, owing rent and debt service to the Finance, Insurance and Real Estate (FIRE) sector. This rentier overhead leaves less wage and profit income available to spend on goods and services, bringing to a close the 75-year U.S. and European expansion since World War II ended in 1945.

These rentier dynamics are the opposite of what Marx described as industrial capitalism’s laws of motion. German banking was indeed financing heavy industry under Bismarck, in association with the Reichsbank and military. But elsewhere, bank lending rarely has financed new tangible means of production. What promised to be a democratic and ultimately socialist dynamic has relapsed back toward feudalism and debt peonage, with the financial class today playing the role that the landlord class did in post-medieval times.

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Spot on. The FIRE sector needs to be burned down (pun intended).

A significant improvement on yesterday's Davos conspiracy stuff ;-)

 

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Attacking a person's character or motivations rather than a position or argument is pointless.

Address the content not me.

 

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When someone shares content, they imply their personal support of that content. I was certainly not attacking your character, but I was questioning your motivation in platforming the Davos great reset stuff. 

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Don't bother on my behalf.

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.

 

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I would argue that it was low interest rates (scaffolded by QE) that drove bank credit into residential property.

The other side of rising discounted present values of asset cash flows reflected in higher capital values is the rising present value of liabilities.

Witness ACC:

The significant impact changes in interest rates have on the ACC scheme was again evident in 2020/21. In the previous two financial years, ACC recorded sizable deficits totalling $15 billion primarily due to interest rates falling to historical lows, a factor outside of ACC’s control. This impacted the discount rate used to value our outstanding claims liability (OCL) which rose to $61.5 billion as at 30 June 2020.

This year the opposite occurred, with ACC recording a $10 billion surplus including a $6.1 billion reduction in the OCL. As New Zealand’s economic outlook improved, the OCL fell due to the impact of rising interest rates, partially offset by changes in experienced and forecast inflation rates that increases the expected future cost of existing claims.

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Audaxes...  Its not landbanking per se, but Real estate prices and rents that raise our business cost base. ( Call it "Land" )

Modern economists dont really look at land in regards to economic activity....  They just lump it in with "Capital".
As you say, it imposes a cost structure on business, both for  owners and employees.

For me, it drives a business cycle....  ie. a real estate cycle leads a business cycle....     The big sign of a coming business down turn is a downturn in Urban Land prices.

just my view.

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Can't get a hikoi through Auckland.  Things must be bad.

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round about 2000 years ago, a yet to be famous founder of a new wave of religion, announced something about not getting a camel through the eye of a needle. rich listers today can avail the court system though. regardless of time, some things change yet remain the same.

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I've got to admit Foxy, that looking at the case as presented through the media, this chap can probably keep himself safer doing it his way (assuming he does follow those rules) than doing the MIQ path. Plus the imbalance that is clearly occurring with the allowance of other groups to go through. 

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Racism abounds too. The photos, language and destination suggest that this appears to be mostly Maori and indeed the Maori sovereignty flag is evident, but Hone Harawira says it's done by Pakeha anti-vaxers. Racism is racism, doesn't matter the source and it is unacceptable!

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Tai Tokerau Border Control founder Hone Harawira described the hīkoi as "a scam" 

- I find this is so funny

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A  poignant graphic from Singapore current BAU/ICU/Covid utilization, following  86106 positive tests over the past 28 days.

https://www.moh.gov.sg/images/librariesprovider5/covid-19-chart-(pr)/fi…

Sadly with multiple recent outbreaks occurring in Aged Home facilities , deaths will increase in the coming days

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co-morbidities combined with weakened immune systems will do that. Sad. 

Singapore and us would have been better to vaccinate the young first. 

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I think this current outbreak is showing the benefit of the early vaccination of the old and vulnerable policy.  Although we're getting lots of cases, hospitalisations are staying under 50 and the number in ICU is constant at around 5 (and guess what, even now they're overwhelmingly unvaccinated although there's been plenty of time for everyone to get protected).

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look at the Singapore data, no deaths in anyone under 20.  Yet the push to get 5 to 12's vaccinated goes on.  Unnecessary scare mongering.

Im pro vax, and have been.  But the push to get kids done to save them is unnecessary.

Lets sort out the diet, diabeties, obesity, etc - which  will really save our ICU's

Proportion (%) of cases who died, by age and vaccination status

https://www.moh.gov.sg/covid-19/statistics

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Must be some more news than Covid, Like a broken record

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Pankers,  given recent announcements made in New Zealand , if ICU utilization including that of Singapore, does not interest you, add a comment with your news of interest or alternatively upload a selfie or a photo of what you had for breakfast. 

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I imagine once the "herd immunity though vaccination" strategy fails and the "vaccine passport strategy" proves to be ineffective Cindy will move onto the "lock up the old people for to protect them from covid" strategy. Covid is a lose lose proposition. 

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Many of the old are already effectively quarantined anyway, in their rest homes, so no real worries there, other than their families bringing it to them. Those closest to you are your biggest threat! check them for their attitudes!

But there is more evidence coming out as science runs to try to understand COVID. This report talks about how they've identified how COVID messes with your brain. As previously stated - you really don't want to catch it, doesn't matter how old you are!

https://newatlas.com/health-wellbeing/coronavirus-damage-blood-brain-barrier-cells-cognitive-long-covid/

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Seems to mess with some brains before they catch it.

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So true!

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"Breakfast briefing; Higher inflation isn't going to be transitory"

 

Is this not everyone was saying that Mr Orr is manipulating and parroting fed (as it suits him) just to silence the opposition to allow him to pump money and inflate assets.

When governor of RBNZ comes out with personal assurance that inflation is transitory, people have no choice but to accept though knowing what this people are upto.

Irony is,  still these people are in denial and using coronavirus to cover their vested agenda.

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"There is no inflation"

"There is a bit of inflation"

"Inflation will be transitionary"

soon..

"Inflation is here to stay"

"We have it under control"

....

These clowns know exactly what is happening and what they did but will lie with a straight face to the public, and we pay their salary. They should be tried for treason.

 

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Once it gets into the wage cycle - it is never transitionary. What the bond markets are saying is we believe this is now embedded in wages.

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"When is becomes serious, you have to lie" (JC Juncker, ex- chairman of Eurozone Finance Ministers)

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And much earlier same sort of locality,  Adolf fielding complaints amongst his  inner circle about the continual lying by his deputy Goering, responded something like - what am I supposed to do, hell even Goering doesn’t know when Goering is lying.

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According to Tony Alexander- the banks are significantly tightening lending - he is warning of a potential "credit crunch"

 

Tony Alexander: Countdown to December 1 and the big squeeze on borrowers, All things property, under OneRoof

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Let's hope so.

It won't be pleasant, but the long-term alternative will otherwise be horrific.

(eg: Our young will have to wait for the parents to die to get into a home. The problem is, those parents will have had to reverse-mortgage those same homes to live out their own lives. End result? The Banks take the houses and our young will be left on the streets. Not a recipe for harmony in society)

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Good piece, but I think he has under-done the likely impacts, possibly because it suits him to. 

He mentions construction - I think this will be hit more than house prices.

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If the government was serious about getting 90% vaccination rate.

Make getting a benefit or any government funding dependent on being vaxxed.

And stop yet again picking on the productive parts of society by threatening their incomes.   

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Kick the vulnerable while they're down, sounds about right these days.. 

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Not really. The vaccine is free and everyone should get vaccinated (unless they have a legit medical reason not to). Right now the 10% is holdig the 90% hostage. I can't take my kid to daycare, so my partner can't work, so we're losing her income because of covidiots who "did their own research" on facebook. Many low income families are also losing thousands of dollars a month unless they're essential workers.

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Do the unvaccinated hold a daily presser, telling you what you can and can't do (in as minimal detail as possible)?

Do the unvaccinated change legislation to suit their narative?

Did the unvaccinated set an arbitrary 90% vaccination target?

Do the >60% who do not get the flu vaccine each year hold you hostage? What about the 25% that aren't vaccinated against measles?

Let's be very clear on one thing. The people that are not vaccinated against Covid are not holding you hostage.

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In a democracy the majority is supposed to be making decisions.

Also your comparison to the flu is just (intentionally?) ignorant at this point.

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Oh dear, the Government's plan to divide us is working! 

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Ah yes, they intentionally wanted to divide the vaccinated 90% from the unvaccinated 10%... So just tell me, why do you think that pretty much all governments in the world are pro-vax?

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In a normal hostage taking scenario do you blame the bad guys with the guns and all the power? Or the hostages who won't comply with the hostage takers' demands?

 

 

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Speaking of hostage taking - i note on the news the Government have flagged they are going to STEAL water infrastructure in the Three Waters Reforms. Clearly the push back they got is intolerable. The election losing strategies by them are mounting fast. But this one is bad. Some reading I have done postulates that water charges may increase by up to three times in some areas. The Government is increasingly becoming autocratic/dictatorial and untouchable. And they still want to extend election terms!

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Business owners and in particular SME’s are very vulnerable right now. For most more so than ever. 

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And we should also note that the US "five year break even inflation rate" is now touching 3%, the first time it has done that since 2005. Essentially, it is signaling that the bond market is betting inflation is here to stay - it isn't going to be transitory. Similar signals are coming from European markets.

Yeah Right !!!

What *Seems* Inflation Now Is Something Else Entirely

An Anti-Inflation Trio From Three Years Ago

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So you don't think inflation is here to stay?

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The people who will are in charge of "making" almost all of the real money required for inflation don't seem to think we will get it.

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Check out current negative real US Treasury yields and draw your own conclusions.

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"We do not have an inflationary future at all, and this will become apparent not just when these pandemic-induced supply issues are resolved, but when these asset bubbles pop".

David Rosenberg: Deflation not inflation will be the topic when housing, equity bubbles pop | Financial Post

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It's not hard to figure out whether inflation is persist or not by comparing M2 with NZ productivities: 

New Zealand 10 years GDP data: 

New Zealand GDP | 2021 Data | 2022 Forecast | 1960-2020 Historical | Chart | News (tradingeconomics.com)

New Zealand 10 years Money Supply M3 data:

New Zealand Money Supply M3 | 2021 Data | 2022 Forecast | 1977-2020 Historical | Chart (tradingeconomics.com)

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I'm holding my breath for when mr Snider changes his narrative.!!   Hes' hanging in there.

Because he looks at things thru a "financial lense", as uses recent history for his "financial template", he does not see that there have been periods in history where we have had low long term interest rates together with periods of inflation.

In that environment ( financial repression ) the bond mkt does not "show the way", in regards to inflation.... like it normally might.

Also...historically inflation is often transitory , in that it ebbs and flows.  https://en.wikipedia.org/wiki/Consumer_price_index#/media/File:Inflatio…

just sharing my view.... I'm not pissing on his view..   :)

 

 

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In other news: Tesla is now worth a trillion dollars. Hertz's order of 100,000 cars bumped up its value by 13 percent, earning Musk 36 billion dollars in a single day.

Two really funny and absurd details about this:

1: Hertz was pretty much bankrupt and got saved by Wallstreetbets, who bought it en masse as a meme stock "for the lulz". You can't make this sh** up.

2: The entire Hertz deal is worth about 4.2 billion dollars gross (let's be generous, let's say it's about 500 million profit for Tesla). But Tesla's value went up by 130 billion because of it. Makes sense, right?

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And the economics wizz's will tell you that the share market value is the sum of the collective wisdom of those who invest on it! Yeah - NAH! It is mostly emotional value. So being able to determine real value and get good gains is harder than you think!

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Social media turned the share market (and many other asset classes) into gambling platforms. You basically bet on tomorrow's sentiment. Then you bet on other people's bets. Then someone bets on what people think about other people's bets. Prices aren't an indicator of the viability of the business. They're an indicator of what people think about the direction and speed of upcoming price changes. Fuel generously provided by the Fed.

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White gold A2 , shares down 10 percent in early trade on update.

"The dairy producer says China label instant milk formula (IMF) sales expected to be significantly down in 1H22 vs prior period " et al

Undoubtedly , someone will pump the shares on some takeover on some outlet somewhere while the class action lawsuit unfolds.

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