China pisses off its neighbours; China eyes reserve ratio cut; equities end on a high; electric cars come of age; Japan struggles economically; NZ weather normal; UST 10yr yield at 1.88%; oil unchanged and gold dips; NZ$1 = 67 USc; TWI-5 = 71.9

China pisses off its neighbours; China eyes reserve ratio cut; equities end on a high; electric cars come of age; Japan struggles economically; NZ weather normal; UST 10yr yield at 1.88%; oil unchanged and gold dips; NZ$1 = 67 USc; TWI-5 = 71.9

Good morning, wherever you are. Here's our summary of key events over the holiday break that affect New Zealand, with news China is losing friends in its neighbourhood.

China's neighbours are finding some spine and starting to coordinate a response to their claim of the "nine-dash-line" in the South China Sea, which effectively claims all that ocean up to their boundaries. Malaysia has been especially critical, calling the Chinese claims 'ridiculous' and with the others is asserting their own continental shelf claims. This is brave given China has launched two new large aircraft carriers recently, and the Chinese military has moved to prepare for "unexpected confrontations".

And in their financial markets, the Chinese Premier has confirmed that Beijing is looking to further reduce its bank reserve ratio - currently at 13% - to free up more bank lending capacity. In the US, it is effectively 10% of deposits. (New Zealand, like a small set of other countries, does not use the tool, but uses an array of other measures like the Core Funding Ratio.)

Global equity markets are finishing the year on a high. Wall Street, as represented by the S&P500, is up +29%. (This is high, but much less than in other periods over the past 30 years). European bourses, as represented by the DAX30, the CAC40 and the FTSE100, are up an average +23% (but was held back by the FTSE which is only up +13%). Tokyo is up +22%, Hong Kong is up +12% (kneecapped by the protest movement). And Shanghai is up +22% (despite the trade war). Locally, the ASX200 is up +23% for the year, while the comparable NZX50 capital index is up +28% (The NZX50 index is up +33% but that is not on a comparable to the others in the list.)

It has been a year where equity markets have been used more for equity buy-backs than capital raising, and that is especially true in the US. There has also been a flood of retirement savings into equity markets, adding to demand, especially for yield, driving up prices and driving down yields. You can see that easily by comparing those growth rates with the expansion of bank debt, a parallel source of enterprise funding. That rose in 2019 by a much more modest +5.7% in the US compared with a +10.2% gain in 2018. This is more likely to be due to restraint in face of the trade war. (In New Zealand, business debt rose just +6.1%.)

On the bond side, prices for benchmark US Treasury securities rose sharply as well as interest rates fell. The US Treasury 10 year saw its yield fall from 2.66% at the start of the year to as low as 1.46% in early September, but it has risen back to 1.88% today. For bond investors, that is a very healthy +30% rise in the traded price of these bonds on secondary markets.

In comparison, housing price capital gains took something of a back seat. In the US, the median house price rose +5.4% while in New Zealand the rise is +8.6% (although for non-traders, this is still has tax-free status). In Australia it dipped -3.7%.

Back in the US, one of the big trends of 2019 was the rise and rise of the electric car, led by Tesla. Expectations that Tesla would fail left many short sellers seriously out of pocket. In New Zealand, EV sales sharply rose as well, but now at only 12,300, they represent much less than ½% of all licensed passenger vehicles. In addition there are another 51,200 hybrids of various sorts. Together they are 1.8% of the total passenger fleet. 2019 was important in that it showed that EV's, while still expensive and rare, are a viable alternative to petrol and diesel.

(In the US, mass killings rose to a record level in 2019. There were 41, defined as when four or more people are killed excluding the perpetrator. Of those, 33 were mass shootings. More than 210 people were killed. There were no effective public policy responses.)

In Japan, their jobless rate fell to just 2.2% in November, but their retail sales (-2.1% year-on-year) and industrial production also fell (-8.1% year-on-year) , and that may mean Q4 GDP could be negative. More labour cost and less output is a sure sign of fast shrinking productivity. Japan looks like it is heading toward an economic crisis at some point if they don't turn this around soon.

We have been updating the NSW bush fire crisis, and the latest news is that things are about to get worse. Firefighters are now prioritising protecting the water pumping infrastructure around Sydney's largest reservoir that is not only threatened, but ash contamination of the dam's precious and dwindling reserves are also a threat. This particular dam is at record low levels and was last full three years ago.

It's not really news, but we should also note that New Zealand's weather (and soil moisture) has been very normal in 2019, and our hydro lakes and water reservoirs are also at normal levels as we end the year.

The UST 10yr yield is unchanged at 1.88%. Their 2-10 curve is little-changed overnight at +29 bps. Their 1-5 curve is stable at +17 bps. Their 3m-10yr curve is also unchanged at +30 bps. The Aussie Govt 10yr is unchanged at 1.32%. The China Govt 10yr is also unchanged at 3.18%. And the NZ Govt 10 yr is also stable, still at 1.63%.

The gold is marginally softer today, down -US$2, now at US$1,511/oz. Gold is on track for a capital gain of +18% in 2019.

US oil prices are little-changed at just under US$61.70/bbl and the Brent benchmark is now just on US$68.10/bbl.

The Kiwi dollar is holding at 67 USc and a five month high. It is ending at about where it started in 2019, but having got as low at 62.5 USc in September. On the cross rates we are also firm at 96 AUc. Against the euro we are likewise firm at 60 euro cents. That puts our TWI-5 at just on 71.9 and a new six-month high.

Bitcoin is up +2.8% from where we left it on Saturday, now at US$7,397. Bitcoin is on track for a +90% gain from the start to the end of 2019. During the year it ranged +/-137%. The bitcoin rate is charted in the exchange rate set below.

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The soil moisture graph is telling. There's no serious rainfall forecast up top in the first week of 2020.

In New Zealand, EV sales sharply rose as well, but now at only 12,300, they represent much less than ½% of all licensed passenger vehicles. In addition there are another 51,200 hybrids of various sorts. Together they are 1.8% of the total passenger fleet. 2019 was important in that it showed that EV's, while still expensive and rare, are a viable alternative to petrol and diesel.

Where is the lithium? And what is the cost of extraction which will satisfy climate change enthusiasts? Inevitably the savings poor community will rely on readily available hydrocarbon dependent personal transport.

No one cared about lithium mining when we were throwing away iPhones after one year of use. Plus, the stuff under the bonnet of a regular car isn't exactly made of sunshine and unicorns. EVs will have their moment, they are far from a mature technology.

... hopefully the EV crowd won't go nuts at me for saying this , but FCEVs are a promising technology ... being quicker to fuel up the vehicle , and doubling the range of standard EVs ... the hydrogen needed can be produced from an array of methods ...

Most of the electricity used to power EVs in the USA comes from coal fired power plants ...

Fuel cell EVs are rubbish. The hydrogen can be produced two ways.. either from cracking gas or other hydrocarbons (so whats the bloody point?) or from hydrolysis..(electricity to split water) which is just so bloody inefficient (split the water, compress the hydrogen to 10,000psi) , again, why bother.

oh, and the worlds most popular FCEV, the Toyota Mirai has less range than a Tesla model S..
You can recharge a Tesla model S in your garage/driveway overnight while you sleep which is all 99% of drivers really need.
An EV fast charging site is cheaper to build than a hydrogen filling station too.

Really, hydrogen has nothing going for it until somebody makes some massive breakthrough, but there will be some niche applications where it makes sense, somebody suggested hydrogen trains.. big tank that gets filled at one end and then travels across a long un-electrified section of rail. that might make sense if it ends up being cheaper than diesel.

Staying with petrol here for as long as possible even though my life is electronics. I can make my engines last 30 years with regular maintenance and its proven technology. Electric is just not there for me yet and its also as boring as hell to drive and before you try and show me one that isn't remember price is a factor.

yes $2.10 a litre and constantly climbing, was 0.79c/litre when I started driving... plus those regular servicing costs, both monetary and time.

Hence why I am looking at a crappy nissan leaf for commuter duties, no regular servicing, and with a free hour of power from whichever of the electricity companies offer it I reckon I can get my regular commuting for essentially free, just the upfront cost of the leaf and the 7kW EVSE box.

7kW.hr / 0.16kW.hr/km = ~44kms per day for essentially free. vs ~$10/day for a cheap petrol car in fuel costs.
Even if you pay full retail for the power its about $2 vs $10 for an ICE's fuel

There’s a lot of misleading information circulated on EVs and I’m afraid you have repeated an example. Some of it is appears to be sourced back to the US oil and gas industry supported politicians. There is plenty of lithium - I wish there wasn’t as I have shares in a major supplier.

https://www.greencarreports.com/news/1122838_busting-7-of-the-most-commo...

There’s a lot of misleading information circulated on EVs and I’m afraid you have repeated an example. Some of it is appears to be sourced back to the US oil and gas industry supported politicians. There is plenty of lithium - I wish there wasn’t as I have shares in a major supplier.

https://www.greencarreports.com/news/1122838_busting-7-of-the-most-commo...

Last year the predection was that stock market will not do well but has been on top so does predection have any meaning as situation may change anytime.

In Middle of the year Housing market particularly in Auckland was down and predection was that will be down for sometimes to come but in a month or two everything changed and market is on high so again does predection have any meaning.

Everyone knows that the bubble has to burst in future but that future mat very well be 2030 or 2050 or may be next week when the market opens up (Future is future) so basically, all so called experts are running their shops with no one knowing what and when the bubble will burst, if it will burst but I guess are called experts as are abe to to articulate their views with IFs and BUTs.

Hmmmmm...
The prospect of out of thin air central bank money creation and rate cuts further discounting future cash flows to higher present values remains the only driver of upward momentum. Graphic evidence

Courtesy of Hussman :

The idea that “low interest rates justify high stock valuations” is really a statement that “low interest rates justify low expected stock returns as well.” Those high stock valuations are still associated with low prospective future stock market returns.

Worse, the notion that “low interest rates justify high stock valuations” assumes that the growth rate of future cash flows is held constant, at historically normal levels. If, as we presently observe, interest rates are low because growth rates are low, no valuation premium is “justified” by low interest rates at all.

Presently, the combination of record low interest rates and record high stock market valuations does nothing but add insult to injury.

...the iron law of investing is that a security is nothing but a claim on a future stream of cash flows. Valuation is a crucial determinant of long-term returns. The higher the price an investor pays for those cash flows today, the lower the long-term rate of return earned on the investment..
The corollary is also true. The lower the long-term rate of return demanded by investors, the higher the price moves today. So clearly, changes in investors' attitudes toward risk will strongly affect short-term returns. If investors become more willing to take market risk, it is equivalent to saying that they are demanding a smaller risk premium on stocks (that is, a lower long-term rate of return). Prices rise as a result. Now, the fact that current stock prices are higher also implies that future long-term returns will be lower, but that's part of the deal.

Federal / Reserve bank world over have no choice but to print more and more money and drop interest even if it have to go in negative territory.

Have dug themselves into a situation where will be blackmailed by their own action / economy bubble that they have been created and still not learned that it is better for economy to run its own course as can delay it but not avoid and bigger the bubble BIGGER the Consequence.

Politicians world over are only interested in vote bank politics - democracy though needed is becoming outdated and need some changes or be prepared for Trumpism world over.

So still margin to to reduce interest rate and print more money SO based on that economy may survive on easy and free money. Devaluing the value of money.

This is where reserve bank and politicians are leading us to : https://www.aljazeera.com/ajimpact/venezuela-currency-worth-craft-paper-...

Golly gosh, it does seem as if the effect of the Central Planning and Higher House Pricing Forever Committariat of the Communist Central Banking Cartel is to cause division, distrust, and resentment throughout society by enriching the politically favoured at the expense of everyone else. Er, isn't that what Keynes predicted in 1921, the destruction of civilised society by institutionalised inflation? Is that why we have a 2% inflation target?

True, but not the whole truth, or even the important bit. The series of cashflows in stocks are unpredictable, but the market is buying expectations of increased earnings, usually from innovation. PEs are quite moderate where this is not the case - say banks, oil and gas industry etc.its a bit like the 19th railroad boom - a new and disruptive technology controlled by a limited number of companies,with scope for continued expansion. Google PE is still only 25 after massive reinvestment in innovation.

I use the Smartshares FNZ price as a proxy for measuring capital gains in the NZX50 as it is the easiest vehicle for private investors to play the market. Up 27% for the year (before dividends of approx 3% [net]). As a note, I was one of the first investors in the ETF from its inception and made monthly payments until Aug of this year (sold all my holdings). Compared to most managed funds, it appears most NZers would have been satisifed with being in the ETF as opposed to Kiwisaver funds. Yes, the fees are somewhat higher than other ETFs globally, but at the end of the day, it's been a solid investment in the "everything bubble." Where we go from here is anyone's guess.

On aother note, the Gold ETF in Aussie dollars has returned around 19% in 2019. Now is this part of the "everything bubble"? I don't believe so considering central banks and investment firms have arguably been suppressing the price. Mind you, saying things like that opens up a whole can of worms. Important to note gold hit all-time highs in most currencies except for USD.

Futhermore, Merrill Lynch has called Bitcoin the best asset performing asset of the decade. Dollar-cost averaging has been superb.

https://www.zerohedge.com/markets/best-performing-asset-past-decade-and-...

Hi J.C, Stocks shuld do reasonably well as reserve Bank world over, will be going out of the way to support and pump liquidity in the market. Still can play as still a year or two before they touch negative interest - if they continue, the way it is for now.

As long as Eceomoy world over are receiving literally free money will party before going bust.

So next year may also be good for stock market bubble.

Oh I agree with the POV that the "everything bubble" still has legs to run. In fact, many would say it "has to" keep running. The consequences of it not continuing seem to be potentially devasating considering the slowing down of the boomers. A few points:

1. The idea that people should be in a defensive cash mode is kind of crazy when apparently 69% of people in the "world's wealthiest country" have <$1000 in cash savings, even when there is full employment and consumer confidence is up.

https://finance.yahoo.com/news/survey-69-americans-less-1-171927256.html

2. The "everything bubble" is not resigned to equities. On some metrics, housing in the U.S. is as bad as ever. It seems like nothing has been solved since the GFC.

https://www.zerohedge.com/markets/falling-mortgage-rates-drive-9-jump-ho...