90 seconds at 9 am: A confusing mess of public policy

Markets drop on Washington weirdness; EU vows retaliation; China debt issues grow; PISA standards sink; Aussie C/A swells; dairy prices slip; UST 10yr yield at 1.70%; oil unchanged and gold up; NZ$1 = 65.2 USc; TWI-5 = 70.3

4th Dec 19, 7:21am by David Chaston

Here's our summary of key events overnight that affect New Zealand, with news of a confusing mess of negative public policy moves.

The political mess in Washington is unsettling markets today. Wall Street is down more than -1% today compounding yesterday's losses. For the week we are now down -2%. It looks like the Chinese aren't going agree a 'phase one' deal unless the US rolls back tariffs - and the US Administration is saying "there is no time limit" and is backtracking on imposing more tariffs which were due to kick in on December 16. The US is also adding to the list of allies it is offending, this time in Europe, after adding Brazil and Argentina yesterday.

France and the EU said they were ready to retaliate if the US acted on a threat to impose duties of up to 100% on imports of champagne, handbags and other French products worth almost $4 bln in annual trade.

Some European markets fell, others rose. The biggest reduction was for London, England which is down -1.8%.

Risk is back and markets are reassessing how this risk is priced. This time, New Zealand seems to be favoured with a rising currency.

In China, two more large private companies failed to repay bonds worth a combined NZ$770 mln, underscoring rising debt risks as their economy slows.

The OECD released some standardised education test results and that shows New Zealand performing better than the OECD average. But it is a sinking standard and New Zealand education achievement levels are sliding relatrive to other countries. In fact, in math we are now below OECD averages. These are long term declines in achievement that started here in 2000 and haven't improved at any time since. It's a topic that should get more public discussion as neither side of politics has policies that are making progress. It can't be an excuse that Australia is performing worse, as is the US. American standards may be low, but at least they are not falling further. The worst bit is that New Zealand is now far behind Chinese education levels.

Australia has recorded another current account surplus, this time +AU$5.2 bln in Q3-2019. Its goods surplus was a whopping +AU$21.9 bln. (If you read other reports, these numbers will be higher because others are reporting 'seasonally adjusted' results; we are reporting 'original' results.) This means for the full year, Australia's current account surplus is +AU$3.9 bln and its goods surplus is +AU$66.7 bln. (In the year to September 2018 they had a -AU$48.3 bln C/A deficit, so the shift in one year has been enormous.)

There was a rate review in Australia yesterday, and the wait-and-see / gentle-turning-point policy remains. But the Aussie equity market took fright yesterday, down -2.2%.

There was also a dairy auction overnight. This one broke the string five rises with a small -0.5% fall. But both the key SMP and WMP commodities managed a gain even it they were minor. Overall in New Zealand dollars however the result was down -1.9% on the rising exchange rate, being pushed up by Government stimulus announcements and expectations.

Bond yields are on the move, and quite dramatically. The UST 10yr yield has fallen back sharply today, now at 1.70% and a -13 bps fall since this time yesterday. Their 2-10 curve is has narrowed sharply, now at +17 bps. Their 1-5 curve has turned negative -4 bps. Their 3m-10yr curve is also sharply narrower +8 bps. The Aussie Govt 10yr is at 1.07% and that is a -7 bps fall since this time yesterday. The China Govt 10yr is now at 3.23%, and a +1 bp rise. The NZ Govt 10 yr is now at 1.43%, and +7 bps rise.

Gold is +US$18 at US$1,480/oz.

US oil prices are little-changed today at just on US$56/bbl. The Brent benchmark is just on US$61/bbl.

The Kiwi dollar is marginally higher, now at 65.2 USc. On the cross rates we are now staying up at 95.3 AUc. Against the euro we unchanged at 58.8 euro cents. That leaves the TWI-5 up over 70.3.

Bitcoin is firmer today at US$7,327 and up +0.6% from this time yesterday. The bitcoin rate is charted in the exchange rate set below.

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

Daily exchange rates

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Source: RBNZ

Source: CoinDesk

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63 Comments

by Andrewj | 4th Dec 19, 7:25am 1575397550

Gundlach
https://thesoundingline.com/gundlach-us-market-will-not-recover-from-ne…

by ham n eggs | 4th Dec 19, 9:02am 1575403378

"If you weren’t expanding the national debt at all, if you were just keeping it constant, we would actually have negative nominal GDP right now. So, it’s kind of a sobering thought that the entire expansion that we’ve had in the recent several quarters is all debt based"

by Independent_Observer | 4th Dec 19, 10:38am 1575409112

Andewj - question is, do you now reduce your US holdings and if so by how much? I've been slowly taking profit from my US IVV holding the last few years.

by dictator | 4th Dec 19, 11:46am 1575413165

I only have a small amount of US holding via a global index. Not taking that sub-1% amount out, just leaving it as is.

The US markets have been acting foolishly, part of it is that they believe everyone tells the truth. It's taken months for the market to realise that Trump has been lying about a deal and has just be playing the market for his own personal political gain. If you are going to sell you could sell before the 15 December tariffs kick in, or hold until Trump's impeachment in January. You could even hold through to the Presidential election if you're game. However no one knows when the wheels will fall off and the market panic starts, as it could still be years away.

by Independent_Observer | 4th Dec 19, 12:28pm 1575415709

Thanks dictator - good points. I'm getting to the point where I think that buying undervalued individual US companies is a better option now than index investing. Market risk appears to be growing, and potential return diminishing. Any thoughts?

by dictator | 4th Dec 19, 12:56pm 1575417395

The P/E ratios in the US indicate either a peak or expansive potential growth. One red flag for US companies is those that have borrowed to buy back stocks. They have large amounts of debt with no significant growth. Anything you buy you need to check the balance sheet for debt and assess from their. There is a possible scenario that could contaminate the corporate bond market and may make rolling over corporate bonds difficult or impossible if it ever plays out.

Sometimes I find having a system to check if I've gotten caught up in hype or not. An example system for deciding if the market has peaked or not may help in decision making.
https://www.youtube.com/watch?v=ebWL2TrIssA&t=2s

Likely cuts in the Fed Rate could keep pushing the market higher (potential gains), but no one knows when it will run out of steam, or if there is an event that may disrupt the markets. US markets have a lot of liquidity so you can get out of positions rapidly but there is still the risk of losses if the market gaps down. Although options could be used as insurance for that scenario.

Of course I'm staying out of the US market, but that doesn't mean there isn't money to be made there. It's just yield seems to be poor in the US (from my perspective).

by theglc | 4th Dec 19, 10:13pm 1575450804

There will be no impeachment.

There is no real crime committed & no evidence of a quid pro quo not that that is necessarily a crime either. Remember Biden openly bragged about giving Ukraine a quid pro quo to fire the investigator who was investigating his son.

The Dems are in a panic to impeach for something ever since Trump was elected, now they are looking like a bunch of eggs

Anyway Senate needs to vote >66% and republicans have the majority so wont even get 50%

by Kezza R | 4th Dec 19, 7:30am 1575397829

If there was a way out of recession, there isn't anymore.

by bw | 4th Dec 19, 7:43am 1575398625

A bit of optimism, please, on this lovely Wednesday morning! There is ALWAYS a way out of a recession/depression. It's just a matter of where the starting point is for that...and if the opinions of the interviewee in Andrews' clip above is any guide, that will be with prices 50% below where we are today.
Chin up!

by Kezza R | 4th Dec 19, 9:13am 1575404020

Yes there is a way out and that would be if the world worked together to fix the problem now. That would involve a controlled restructure of the world's economy to something like a gold backed crypto or such and massive amounts of debt wiped.
You can guess the chances of that happening.
If the real debt figures and inflation figures were exposed the whole shooting match would fall apart in an instant..

Sorry there is no painting a way out that looks good. It is upto the individual to protect themself at present.

by youngdumbandbroke | 4th Dec 19, 10:51am 1575409878

War??

by Kezza R | 4th Dec 19, 11:06am 1575410804

Are the masses still that stupid to go now is the question.
Most likely but it would be a hard sell.

by youngdumbandbroke | 4th Dec 19, 11:09am 1575410970

Instead of repaying debts, just defeat the creditors on the battlefield

by Uninterested | 4th Dec 19, 7:55am 1575399307

Could it be that the fall in education standards are due to the falling diversity of teachers? ie Less men?

by Kezza R | 4th Dec 19, 8:13am 1575400411

Labour appoints MP's on their sex, 50% have to be females. Maybe there is a comparison there somewhere.

by murray86 | 4th Dec 19, 8:04am 1575399851

More likely too soft, and less demanding of standards. The real world demands capability, our schools should too.

an aside; any idiot who thinks that gender or race has anything to do with capability needs to go get a brain transplant.

by Kezza R | 4th Dec 19, 8:12am 1575400355

The male students could be struggling to adapt to a system run by females, so genda can play a roll.

by murray86 | 4th Dec 19, 9:00am 1575403207

That's not capability, but the way a subject is taught. I had a change in math teacher in secondary school and went from struggling to achieving. Learning systems should not be confused with capability. Most people are capable of learning almost anything, it is how they are taught that matters, and schools often struggle accommodating all the different learning styles.

by Kezza R | 4th Dec 19, 9:27am 1575404831

Fully agree mate. I failed at school in an environment that I was told to learn and there was no explanations. My brain needs to dig deeper and figure out the where, why, what and how's. In the real world that's how I roll and it serves me very well.
In a lot of ways the current system would have been better for me but on the flip side failing at school developed other skills which serve me very well.
It comes down to the inderviduals drive and determination.

by Kezza R | 4th Dec 19, 9:46am 1575405988

My light bulb moment came when I realised all I was doing is writing word for word off a black board and not understanding a thing. So I stopped writing and sat there and wrapped my head arround what was being written. That resulted in a couple of detentions for refusing to do so. Exam time came and I jumped up 25% in my subjects to be arround the 65%. I was called infront of the deputy headmaster for cheating on one of the exams and told them what I had been doing and I was understanding it and it was showing with better results. I ended up doing another exam which showed I didn't cheat and they let me carry on doing what I was doing.
In provincial NZ in those days (late 80's) it was a big call to buck the system.

by frazz | 4th Dec 19, 9:52am 1575406324

Nice work..I wish I had the same gumption..loved to read wish got me through I guess.

by brisket | 4th Dec 19, 11:26am 1575411974

Yeah, I'm the same. Went through uni without taking notes... would just listen to the lecturer. I never understood how people could listen and understand properly while also writing, highlighting, etcetera... Anyway, I always did well in the exams.

by Yvil | 4th Dec 19, 11:29am 1575412161

Great story Kezza, love it!

by Kezza R | 4th Dec 19, 12:13pm 1575414827

At one stage they said they were going to cane me and I said ok but my way is working and yours isn't. I think that was the turning point in the conversation.
Thinking about it now, it could have turned into a legal nightmare for them. Cane a student for doing better...

by Foyle | 4th Dec 19, 9:20am 1575404456

Your assertion is just wrong. Contradicted by vast amounts of science. It's an awful reality, but the universe is uncaring about fairness. Those of east asian and ashkenazic jew ancestry are massively over-represented in elite intellectual activities because they are smarter on average and so dominate at top end of bell curve. Intelligence is mostly genetically determined (~80%) and highly heritable; child IQ is on average 0.25*(dad+mum+2*population average), so if mum and dad are both 130 their kids will average ~115. If mum and dad are both 70 their kids will average ~85. The children of poorest white families in US have higher average SAT scores (basically an IQ test) than children of richest African American families (look it up yourself). There is also greater variance in Male intelligence/ability (evolution apparently takes more risks on easily replaceable sperm donors) so that they dominate the dumb and the genius ends of the spectrum, above 140 and below 60 IQ is about 1.4:1 male to female.
If you ignore these realities then you are going to waste a lot of money and effort on trying to achieve things with education and social policy that are fundamentally impossible. Equality of outcomes that progressive left crave will never be possible until we learn how to modify brains at a genetic level. Accept the cruel reality and try and build education systems that can better optimize outcomes for everyone.

by Lapun | 4th Dec 19, 9:45am 1575405918

It is brave to actually assert IQ data. When it is used by those who believe they are in the top groupings it is simply rude. But the virtuous urge to treat everyone the same causes blindness to facts. Men and women are equal - well of course they are in the eyes of god and our laws but seriously can't we mention that men are taller? A loose way of saying the average man is noticeably taller than the average woman.
Differences in brain power are less noticeable and IQ is a debateable measure. How does IQ keep increasing by 2 points every decade if it is significant? Claude Shannon was accepted as a genius by those who knew him but as his sister pointed out his IQ of 125 was less than hers. Taleb recently pointed out that IQ was a good measure up to 100 because it measured mental impairment but above 100 was meaningless.
Totally agree that attempting equality of outcome is wrong. The Jewish quota stopped Richard Feynmann, America's greatest physicist, going to the university of his choice! So far nobody has suggest one third of female undergraduates should be failed so an equal number of men graduate.

by Kezza R | 4th Dec 19, 9:55am 1575406518

I've got pleanty of friends / people I know who are book smart but struggle with the simple stuff.
I can hire smart people anytime but people that are hard to find / trust / afford are advisers that are good. They are the CEO's or running their own bussiness and get rewarded well.

by Lapun | 4th Dec 19, 10:22am 1575408122

“The older I get the more I admire and crave competence, just simple competence, in any field from adultery to zoology.” ― H.L. Mencken

by murray86 | 4th Dec 19, 10:51am 1575409869

I think that a lot of what you talk about is the ability to learn. An aspect of this is culture. For centuries most cultures on this planet have an aspect of protecting women, based on the principle that they are 'mothers'. The effect that this has is that most women are prevented from being exposed to learning opportunities, be they risky or not. So per my comment above, this is not about capability, but about opportunity and attitude.

At the gym I attend there are a lot of school kids attend and i spend some time talking to them about attitude. I tell them that what they achieve in the gym, and in the world, depends on their on their attitude. With the right attitude anything is possible. It is not about what you can't do today that counts, it is what you can do tomorrow, next week, next year..... If someone tries to hold you back, walk away from them, go around them, get past them. Don't let anyone tell you you can't do something because you're a girl or boy, dark skinned, tall, short, fat, skinny, got hair or not. Your limits sit in that space between your ears, you decide what they are. Those who try to hold you back are just jealous, leave them behind. No one goes through life on their own, so find someone who will support and encourage you, help you identify and solve the problems that stand between you and your goal and go for it. Every journey starts with the first step. Failure is just a part of the learning process on that journey - DO NOT GIVE UP! It is too easy to quit. No matter what someone else can do, there will be something you can do that they cannot. Finally all problems become surmountable with the right attitude.

by Kezza R | 4th Dec 19, 11:10am 1575411023

So true. If no is the answer, find another way arround that obstical.

by frazz | 4th Dec 19, 10:59am 1575410354

Does IQ Matter in Business?
The problem with relying on IQ — or even IQ-style, theoretical questions — to predict business success isn’t with what IQ actually measures. In fact, cognitive ability is certainly important for many jobs. Rather, the problem is with what IQ doesn’t measure.
Your IQ score won’t tell you (or your boss, or your hiring manager) anything about your emotional intelligence, your creativity, or your practical intelligence, i.e. “street smarts.” As much as we sometimes wish they did, real business problems don’t always have a single right answer reached by a single method, and they aren’t removed entirely from outside experiences.
Real business problems — practical problems — require you to recognize the existence of a problem, seek out information to help solve it, gather various acceptable solutions, and evaluate those solutions in the context of prior experience and relationships. They also require you to be motivated and involve yourself personally.
https://thinkgrowth.org/why-some-of-the-most-successful-people-arent-th…

by Yvil | 4th Dec 19, 11:33am 1575412391

"Does IQ Matter in Business?"

by Foyle | 4th Dec 19, 1:00pm 1575417638

Intelligence is important, but conscientiousness (hard working) is probably nearly as important for a lot of roles. But more and more repetitive jobs are disappearing to be replaced by roles that require good decision making and judgement - which are benefited by intelligence. Rise of AI is only going to emphasize IQ as most powerful currency for employability.

by Fritz | 4th Dec 19, 10:10pm 1575450632

Yes, it's not PC but it's true. Some ethnicities on average, are smarter than others.
And some ethnicities, on average, are more athletic than others

by Hamish | 4th Dec 19, 8:36am 1575401802

https://www.newshub.co.nz/home/lifestyle/2019/05/revealed-thousands-of-…

by Andrewj | 4th Dec 19, 8:38am 1575401893

https://quillette.com/2018/06/11/tragedy-australian-education/

by Mark Hubbard 1965 | 4th Dec 19, 8:02am 1575399751

As someone who is giving back all the earlier year bond rally returns (only place I've bet inflation anymore, but already down to annualised 6.5% and heading south) why are our longer term yields up in the face of such falls overseas? Yes, I know, infrastructure, but painting schools produces nothing, and on the global reset, our pimple economy is along for the ride.

I'm assuming a fall in NZ longer yields over next few days.

by bw | 4th Dec 19, 8:28am 1575401324

Funny things happen in December each year (Look at last year for instance!). Books' closing for the break; bonus' calculated - some on a realised basis, others on an accrual. etc. Some chartists eliminate December entirely, for all intents and purposes. But I'm sure we'll all know the reason why in due course; BRR's being the obvious candidate at this stage. Besides, as you suggest, tomorrow, The 5th, is Bank Capital Day!

by Audaxes | 4th Dec 19, 8:32am 1575401532

Wall Street is down more than -1% today compounding yesterday's losses. For the week we are now down -2%.

Not much in terms of fundamentals holding it up. The prospect of out of thin air central bank money creation and rate cuts further discounting future cash flows to higher values today remains the only driver of upward momentum. Graphic evidence

by Kezza R | 4th Dec 19, 8:29am 1575401366

And devalueing money day by day.

by Audaxes | 4th Dec 19, 8:37am 1575401828

It must be hard to get up in the morning to trudge off to work when one is renumerated in a fiat currency undermined by unelected central bank ideologues - witness R* (neutral interest rate) nonsense underpinning interest rate policy decisions.

by Kezza R | 4th Dec 19, 9:03am 1575403403

If you are struggling from day to day, you don't have the head space to ponder the big stuff. It's just put food on the table and keep trucking.
In 2008 I was about to subdivide a section and build.. then there was no money to do that. The way it actually panned out over the next ten years was a by far better out come anyway. Hind sight has 20/20 vision.

by Audaxes | 4th Dec 19, 9:36am 1575405387

Our future is realised offshore: German Lenders Open Floodgates to Negative Rates for all Savers

ECB: We are right behind those other central banks plotting to increase their powers by abolishing cash, squeezing out banks, introducing central bank digital currency and getting you all microchipped. Link

by Boatman | 4th Dec 19, 9:29am 1575404986

While current account surplusses are fundamental an indicator that the Government is prudent and living within its means , too big a surplus is not good either .

Too much of a surplus could lead to problems , and whats the point of a surplus way above the immediate needs plus a small buffer ?

Government is there to act as a stimulus to the economy when needed , and while we dont want the economy to overheat or cause inflation , they need to get the balance right

by Kezza R | 4th Dec 19, 10:00am 1575406806

Yeah, we are seeing how much faith Joe & Sara Blogs have at present with the polling and bussiness confidence down with Labour running the ship.

by Pragmatist | 4th Dec 19, 10:14am 1575407679

Business confidence is always down when Labour is in.. even though it usually doesn't actually correlate with lower growth. So ignore business confidence survey levels, they are irrelevant. Changes during the term of a govt may be worth watching, but again, large grain of salt required.

And the polling indicates its a pretty even split chances between a Labour or National led coalition at the moment, highly dependent on how ACT and NZF do on election day. I expect voter turnout is going to be lower than the last election (which tends to favour National) unless something changes to invigorate the electorate, at the moment we are picking between two decidedly average choices.

by Roger Witherspoon | 4th Dec 19, 10:49am 1575409776

If the unemployment rate starts climbing then the election could get quite exciting. Overseas elections are getting downright frightening as society seems to be polarising and people hurling threats and insults more freely.

Britain is scary, particularly if you are Jewish. I never thought this would happen:
https://www.telegraph.co.uk/news/2019/11/28/minority-group-living-fear-…
https://www.telegraph.co.uk/politics/2019/11/27/anyone-corbyn-meet-jewi…
https://www.telegraph.co.uk/politics/2019/11/23/labour-activists-target…

by Ngrrk | 4th Dec 19, 2:13pm 1575422006

It's always puzzled me how the left can rail against racism but only if it's the 'right group'. They seem to be eerily silent about the rise of anti-Semitism globally.

by Fritz | 4th Dec 19, 10:12pm 1575450778

The left is full of inconsistency. Witness Ardern's sympathy towards Islam, despite proclaiming to be an advocate for women's rights.

by Kezza R | 4th Dec 19, 10:50am 1575409803

National being on par with Labour is speaking for itself when they have Bridges and Colin's at the top and we still a long way to go. That's how I take it.
NZF is looking shabby and a large voter base feel that they were turned in by Winston going Labour. Let's face it Winston will not be arround for the duration of the next term which leaves Shane Jones. No king maker on the cards this time arround.
The Greens are as quiet as a church mouse (except for their internal squabbles) and have never been able to deliver squat but their youth vote keeps them in the game.
I expect National and Act to pick up NZF vote. Maybe Act is the new NZF that keeps the major party honest... Something NZF did not excel at this term.

by rastus1 | 4th Dec 19, 12:27pm 1575415667

I'd expect inevitable swing to the left. Demographics and wealth transfer being the reasons. One vote each...which group is growing?

by Kezza R | 4th Dec 19, 1:24pm 1575419040

Yes and Jacinda has only just started the money scramble.
Hopefully people can see that she is not the person to lead us in times of trouble.

by frazz | 4th Dec 19, 3:50pm 1575427857

Anyone can really - just smile and wave

by Andrewj | 4th Dec 19, 12:03pm 1575414187

Hyakujos Fox
https://www.epsilontheory.com/hyakujos-fox/

by antonymouse | 4th Dec 19, 2:23pm 1575422582

In the end, all you can really do is carry your cross to the finish line. Except there is no finish line, there is no cross, and there is no you.

Thanks AJ great read

by youngdumbandbroke | 4th Dec 19, 6:32pm 1575437533

Good read alright thanks

by bw | 4th Dec 19, 2:57pm 1575424627

...which is why current fashion is to say "Debt doesn't matter!" or "Why be honest? If you don't break the Law or cheat and profit from it, someone else will, so it may as well be you"
It's not how I was brought up, but if given my family rearing time again, would I again instil my values in my children? Or prepare them differently for the way Life is today? From the way things are going, the answer is obvious...

by SimonP | 4th Dec 19, 12:17pm 1575415025

Clicking on the 'education achievement levels are sliding' link goes to 'Tunghsu Optoelectronic shares halt trading after bond default'

by Andrewj | 4th Dec 19, 12:22pm 1575415338

which is an education in itself

by Andrewj | 4th Dec 19, 12:21pm 1575415312

Oil heading to $40
https://wolfstreet.com/2019/12/03/crude-oil-could-fall-to-40-if-opec-fa…

by youngdumbandbroke | 4th Dec 19, 6:33pm 1575437606

Yet our petrol prices haven't come down any - typical

by bw | 4th Dec 19, 3:22pm 1575426175

Anyone left on the planet that still thinks New Zealand interest rates will be able to stand back from everyone else?!

The central bank may buy up to A$50 billion of Australian government bonds as part of a QE package as early as next year.....The central bank is likely to push rates to as close as zero as they think they can without damaging the banking system

https://www.bloomberg.com/news/articles/2019-12-03/asset-managers-gear-…

by Kezza R | 4th Dec 19, 3:30pm 1575426645

Only Jacinda who thinks we can go ot alone and saty in the 20% DGP range.
That's doing to smack her in the face.