Holiday briefing: Disappointments and distortions

US non-farm payrolls disappoint; ditto for Canada; Taiwan's export prowess continues; the IMF warns on China distortions; UST 10yr at 1.10%; oil up but gold slumps; NZ$1 = 72.5 USc; TWI-5 = 73.7

9th Jan 21, 8:45am by David Chaston

Here's our summary of key economic events over the New Year holiday break that affect New Zealand, with news markets are facing ever more large financial stimulus as authorities battle sagging economic prospects.

In the US non-farm payrolls fell in December in an unexpectedly disappointing result. Analysts had expected a +100,000 rise but in fact they fell -140,000. It is a backsliding of the minor economic recovery that took place over their summer and autumn. But markets aren't worried; there is an opportunity for 2021 to be the year of a considerable bounce-back, thanks to monetary and fiscal stimulus that will be more flexible and forthcoming after January 20, the delayed effects of buoyant markets over the last few months, and above all the expectations of widespread coronavirus vaccination. Whether that opportunity converts into reality is a major question. 'Reality' has been in short supply in the US over the past four years.

In December 2020 there were 8.9 mln fewer people employed than in December 2019. Their participation rate was 61.5%, and down from 63.3% a year ago. And all this happened while their working aged population grew by more than +1 mln people. Average wage rates rose but that is because job losses were hardest in low-paid employment and removing them from the averaging calculation.

Canada also recorded a sharp fall in employment in December. A fall was expected there, but the -63,000 was far larger than expected and wiped out the +62,000 November gain.

Taiwan's export prowess continued in December with another +12% year-on-year rise and boosting their trade surplus to +US$5.8 bln for the month. Helping that was a slowdown in their imports.

The IMF says China's economic growth will rebound to +7.9% in 2021 after dipping to +1.9% in 2020, and then expand in the +5% range over the following 15 years. But more importantly, they are calling out the slow pace of structural reform in China and its reliance on debt and Beijing stimulus for this growth. They report that central government debt will grow to +113% of GDP by 2025 and that ignores provincial and local government debt. The IMF implores than to shift away from growth based on massive infrastructure projects, to one driven by consumer demand and supported by a much better social safety net system.

The IMF said China needs to find a way to wind down problem banks, and it warns of the 'decreasing quality' of Chinese corporate debt.

China has reported rising foreign exchange reserves, now up to US$3.217 tln as at the end of December 2020 and almost +2% higher in a year. These are now at a five year high.

Chinese authorities are succeeding in holding iron ore and coal prices from rising further, but they are not managing to get them lower following the recent sharp run up. However they are not succeeding in getting key imported food commodity prices from their sharp rises, which are continuing. And this is despite sharp falls in local pork prices recently.

In New Zealand, check the soil moisture maps below; 2021 is remarkably normal, not a feature usually reported when the weather or climate is discussed these days.

Wall Street is flatlining today with the S&P500 up a minor +0.1% in early afternoon trade, but holding on to recent gains and finishing at a new record high. That is two consecutive weeks where the S&P500 has risen +1.4%. Overnight, European markets rose about +0.6%. Yesterday, the very large Tokyo market rose a strong +2.4% and for the week it gained +2.5%. Hong Kong rose +1.2% yesterday. also for a similar weekly rise of +2.4%. Shanghai fell -0.2% yesterday but they still booked a +2.8% weekly gain. The ASX200 rose +0.7% yesterday for a weekly gain of +2.7% while the NZX50 Capital Index rose +0.5% yesterday and cementing in a +3.6% weekly rise and finishing at a new record high.

The latest global compilation of COVID-19 data is here. The global tally is rising faster, now at 88,390,000 and up +956,000 overnight. We are heading for 100 mln before the end of January mainly because the UK variant is taking off worldwide now. It is still very grim in Russia (+23,000 overnight), the UK (+63,000), and South Africa (+21,000). It is surging again in Europe with Italy up +18,000 overnight, Spain up +42,000, France up +25,000 and Germany up +33,000. Sweden recorded another +13,000 cases overnight. Japan is stressed with a rising tide of cases, up +8000 yesterday. China is facing a new surge too but reliable data is suppressed. Global deaths reported now exceed 1,905,000 and surging +16,000 in a single day as death rates rise everywhere.

But the largest number of reported cases globally is still in the US, which rose a record +310,000 overnight for their tally to reach 22,190,000. The US remains the global epicenter of the virus. The number of active cases rose overnight and is now at 8,666,000 and that level is up +184,000 in just a day, so more new cases than recoveries again by a substantial margin. Their death total is up to 375,000 however (+5000 and a new daily record). The US now has a COVID death rate of 1129/mln, sadly comparing with the disastrous UK level (1173).

In Australia, their Sydney-based community resurgence is back under control although officials are on high alert over the risks from the UK variant which is starting to show up in the community. That takes their all-time cases reported to 28,547, and +24 more cases overnight with most in managed isolation. But 303 of these cases are 'active' (+6). Reported deaths are unchanged at 909.

The UST 10yr yield will start today up another +2 bps at just over 1.10%. Their 2-10 rate curve is steeper again at +98 bps, their 1-5 curve is also steeper at +38 bps, and their 3m-10 year curve is steeper too at +103 bps. The Australian Govt 10 year yield is up +2 bps at 1.10%. The China Govt 10 year yield is also up +2 bps at 3.22%, while the New Zealand Govt 10 year yield is up another +5 bps at 1.07%.

The price of gold has taken a very big tumble in New York, down -US71/oz or -3.7% to be now at US$1842/oz. Silver is down more than -8% today.

Oil prices are slightly firmer today at just over US$51.50/bbl in the US, while the international price are +US$1 firmer at just over US$55.50/bbl. Rig counts are rising faster now.

And the Kiwi dollar is virtually unchanged at 72.5 USc today. Against the Australian dollar we are softish at 93.3 AUc. Against the euro we are still at 59.2 euro cents. That means our TWI-5 is still at 73.7.

The bitcoin price has pushed well above the US$40,000 level today, but still very volatile. An hour ago it was at US$41,311 which is another +5.1% above the level at this time yesterday. But since it has fallen to US$40,201. 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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98 Comments

by powerdownkiwi | 9th Jan 21, 9:09am 1610136557

" 'Reality' has been in short supply in the US over the past four years."

Actually, David, reality includes not differentiating the last four years from prior ones, which in turn requires divestment of pre-held assumptions.

I'll say it again; Trump was a symptom, not a cause. The USA was the biggest Empire the planet has seen, or ever will see (in consumption terms). And it had hit the Limits, years ago. By some measures, by 1970, by some 1980, but let's plump for 2005-8. It is increasingly in unrepayable debt, it has offshored all of its real production (financing and servicing are entirely parasitic on same) and much of its pollution, and the debt is well on the way to becoming unbelievable (as is ours).

Then what? The disenfranchised who voted with one finger - Brexit and Trump - have not been assuaged. The Limits to Growth haven't gone away; indeed they've become even more pressing. And Climate Change and this minor pandemic, just reinforce the message that there are too many of us, travelling to far/fast/often. You could extrapolate that from the fact that 97% of animal biomass is now us and our attendant animals; wildlife is near-technically extinct.

Don't blame Trump (equally don't blame Farage or Hitler) - although I can understand the need to believe that the world will magically get better via some easy fix. The USA is increasingly looking like a failed State. And there isn't enough planet left for a pretender to replace it. Time NZ looked ahead wisely.

by Audaxes | 9th Jan 21, 9:37am 1610138258

Did anyone back when this whole thing started think that by the first week of the new year, 2021, jobless claims would still be significantly higher than every previous record worst level? We aren’t just revisiting the numbers, it’s completely rewriting the circumstances. The “V” hopes were dashed so long ago, and so thoroughly, the letter itself has completely dropped off the face of the Earth.

It has been replaced instead by “stimulus”; more of the same which had led us to this same place anyway.

The tremendous economic fallout from the recession has now become the baseline. That’s the real takeaway, a downgrade and downshift more meaningful than every electronic payment sent out by the US Treasury Department. Drain the TGA, and to what end?

It’s Thursday, and that means, unfortunately, another peak at jobless claims still way above every other prior peak. The first estimate on initial claims for the new year is in and somehow it remains depressingly 2020ish. According to the Labor Department, another week near 800k. There had never been any week before above 700k. Link

by Andrewj | 9th Jan 21, 10:29am 1610141374

Having Already Dropped for Years, US Auto Sales Plunged to 1970s Level in 2020
https://wolfstreet.com/2021/01/07/having-already-dropped-for-years-us-a…

by treadlightly | 9th Jan 21, 10:41am 1610142073

One person's debt creates another's asset and there can be no money or savings without debt. All assets and liabilities must balance each other out. (stock flow consistent modelling).

by frazz | 9th Jan 21, 10:52am 1610142775

"no money or savings without debt" Bollocks - you just have been told and have never questioned it.

by treadlightly | 9th Jan 21, 11:17am 1610144267

The banks create money when they issue a loan and this is private debt and the government creates money when it spends into the economy and this is the governments debt. All of this information is freely available on the internet. Try this documentary as an example. https://topdocumentaryfilms.com/money-as-debt/

by frazz | 9th Jan 21, 11:55am 1610146554

You are only talking about FIAT..

by treadlightly | 9th Jan 21, 12:03pm 1610147006

What else is there? The days of the gold standard are long gone.

by ham n eggs | 9th Jan 21, 12:35pm 1610148945

If your money isn't debt it cant be of much use

by Squishy | 9th Jan 21, 12:49pm 1610149774

For thousands of years it was based on precious metals stamped into uniform quantities, a coin wasn't just a token it actually had an intrinsic value.

Not that I'd advocate for a return to gold coins or a convertible standard!

by MortgageBelt | 9th Jan 21, 12:22pm 1610148135

The 4 years of ‘unreality were however valued by Israel and Jewish supporters -
Advanced Clinton’s recognition of Jerusalem as capital
Moved the US Embassy to Jerusalem
Stood against Iran & took out a lead operator
Setup peace with several previously ‘enemy’ Arab countries
Etc

https://www.timesofisrael.com/why-trumps-jewish-supporters-say-hes-been…

by Andrewj | 9th Jan 21, 11:01am 1610143318

It's easy to forget that Trump and his family were always Democrats, he just saw an opportunity to become President on the Republican ticket.

by MortgageBelt | 9th Jan 21, 12:28pm 1610148496

Yes, & more Jewish Americans vote Democrat.
If the US moves away from its ‘exceptionalism’ then Israel may be on its own.
Interesting to see the old clips of Trump being interviewed and feted by the liberals and Hollywood set.

by Hook | 9th Jan 21, 12:27pm 1610148474

Trump, and the Bush administrations before him, have created and promoted more misery and destruction in the Middle East since WW2. What Trump did in Jerusalem should have been roundly condemned by the UN. What the Bushes did in Iraq was nothing short of criminal.

by MortgageBelt | 9th Jan 21, 12:30pm 1610148600

The UN, like WHO, has no moral authority.

by Fritz | 9th Jan 21, 2:14pm 1610154868

Jacinda would be well suited to positions at either.

by Foxglove. | 9th Jan 21, 9:14am 1610136872

“expectations of widespread coronavirus vaccination,” well it seems to have got off to a bit of a stuttering start in the USA at least. Guess being midwinter doesn’t help much but the forward planning did have plenty of time, one could suggest. Remains to be seen too, whilst giving protection or hopefully even immunity, whether or not it will slow down transmissions.

by Fritz | 9th Jan 21, 9:16am 1610136982

The UK is in dire straits. Their finances are going to be a huge mess come mid 2021.

by Andrewj | 9th Jan 21, 10:32am 1610141546

sounds like a mess already and getting much worse.

by Squishy | 9th Jan 21, 12:45pm 1610149502

No pity, it was self-inflicted as far back as the Cameron coalition government. Another country that needs to learn its place in a world of superstates and economic unions.

by Audaxes | 9th Jan 21, 10:01am 1610139705

NZX50 Capital Index rose +0.5% yesterday and cementing in a +3.6% weekly rise and finishing at a new record high.

Further evidence of investors capitalising currency debasement. Real 10 year government bond yields stuck at -0.394% present an incentive to extend the stampede to capitalise the perception of rising discounted present values of future asset cash flows. Nonetheless, it must be noted lingering negative real yields imply lower actual future cash flow values.

by realterms | 9th Jan 21, 10:13am 1610140430

Straightforward prose would have the advantage that many more readers would actually understand what you're on about.

by Audaxes | 9th Jan 21, 10:22am 1610140944

But from the point of view of the bank, it has acquired the security without giving up any cash; the counterpart, in its balance-sheet, is an increase in its liabilities. There is expansion, from its point of view, on each side of its balance-sheet. But from the point of view of the rest of the economy, the bank has ‘created’ money. This is not to be denied. Hicks (1989, 58)

We start with the idea of credit creation, specifically a swap of IOUs between a bank and myself involving a bank loan that is my IOU and a bank deposit that is the bank’s IOU. Nothing could be simpler, and yet the mind rebels, especially the well-trained economist’s mind, because this simple operation increases my purchasing power without decreasing anyone else’s. It seems like alchemy, or anyway a violation of some deep conservation law. Real productive resources are the same as they were before, and the swap doesn’t change that, does it?

Spending of the new purchasing power adds another layer of perplexity. If spending increases but real resources do not, then it seems logical that the increased spending must exhaust itself in higher prices—that is the intuitive appeal of the quantity theory of money. My purchasing power may increase, but everyone else’s decreases because their money balances buy less. From this point of view, the alchemy of banking seems like a kind of theft, something to be deplored in the name of economic science and if possible outlawed in the name of the general good. Link

by treadlightly | 9th Jan 21, 11:02am 1610143332

Bank lending is increasing the price of houses because they are a fixed quantity but this is not the case with government spending. There is always spare capacity within the economy for the government to increase its spending, unemployment and under employment are a sign that the government is not spending enough. There are always resources available to the government that can be put to work and so will not create inflation.

by Audaxes | 9th Jan 21, 11:33am 1610145188

The purchase of government bonds by the banking sector can add to deposits in a similar way to the extension of credit to businesses and households.[2] Banks have purchased some of the newly issued state government debt. In the first instance, those borrowed funds are held by the state governments as a deposit with a commercial bank until the funds are spent.[3] In addition, when the banking sector purchases state government debt in the secondary market from the private (non-bank) sector, it credits the deposit account of the seller to pay for the transaction. In both cases, new deposits are created. Deposits have risen in recent months, as banks' holdings of state government debt have increased and as state governments have issued debt (Graph D.3).

Banks' holdings of Australian Government Securities have also risen recently, alongside an increase in Australian Government borrowing, which has contributed to the rise in bank deposits. However, the process of deposit creation is slightly different when the banking sector purchases debt issued by the Australian Government, since the Reserve Bank is the banker for the Commonwealth of Australia. When the Australian Government borrows from the banking sector, it holds the borrowed funds as a deposit at the Reserve Bank until the funds are spent. As the Australian Government spends these funds in the economy, such as in the form of JobKeeper payments to businesses, it adds to deposits held by businesses and, subsequently, to deposits of the household sector through employees of those businesses. Link

by treadlightly | 9th Jan 21, 11:58am 1610146729

Sovereign currency issuing governments such as Australia and New Zealand do not spend borrowed money, they are the source of our currency and they must spend first before taxing or borrowing. The Levy Economics Institute tells us as much here. http://www.levyinstitute.org/publications/can-taxes-and-bonds-finance-g…
Borrowing is not even necessary for modern governments and is a throwback to the gold standard fixed exchange rate days as economist Prof Bill Mitchell explains here. http://bilbo.economicoutlook.net/blog/?p=45106

by Audaxes | 9th Jan 21, 12:30pm 1610148634

We (RBNZ) increased the Crown overdraft facility to assist with the potential for larger-than-usual fluctuations in Crown cash flows

We provide a Crown overdraft facility to help the Government manage short-term fluctuations in its cash flows. We temporarily increased the overdraft from $5bn to $10bn for a three month period to 1 July, to assist with the potential for some larger-than-usual changes in cash flows. The overdraft facility was utilised for a short period coinciding with the Government’s April 2020 bond maturity, and the account has since been replenished following the issuance of additional bonds and Treasury bills. Link

by treadlightly | 9th Jan 21, 12:54pm 1610150075

The RBNZ is the government, they are both on the same side of the balance sheet. They are the left pocket and the right pocket of the same pair of trousers.
Adrian Orr tells us here " the Reserve Bank balance sheet is just part of the Crown balance sheet. It's just that operationally we are set up independently to achieve a particular goal with the instruments that we are". https://www.stuff.co.nz/business/money/114923477/why-reserve-bank-gover…

by Audaxes | 9th Jan 21, 1:06pm 1610150769

Well the "government" no longer relies on the RBNZ overdraft since undistributed bond borrowing proceeds (Crown settlement account) are well above those previously stated overdraft levels.

by treadlightly | 9th Jan 21, 1:26pm 1610151994

All that you need to understand is that the government creates money when it spends and it destroys money when it taxes. What is left over after this creates our private savings, the money that is left in the banking system. This can either be bank reserves or government bonds which are interchangeable with each other as QE shows us, nothing is added or taken away, it's just a change of format.

by powerdownkiwi | 9th Jan 21, 3:06pm 1610157966

"There are always resources available to the government that can be put to work and so will not create inflation."

Wrong.

Totally wrong.

You haven't read much of the stuff Ive referenced over the last decade, methinks.

by Audaxes | 9th Jan 21, 11:02am 1610143354

The Mythical Printing Press Belongs Somewhere Outside the Fed

by Korki | 9th Jan 21, 10:58am 1610143117

Since I started reading interest about 3 years ago, it has been one of my goals to one day actually understand what Audaxes is talking about - because I'm sure it's good stuff.

by Yvil | 9th Jan 21, 12:00pm 1610146847

Wonderful post Korki, I agree Audaxes is probably highly educated and knowledgable in economics but he fails terribly putting his view across in a language that most can understand. True genius is being able to explain something complex, in simple terms.

by MortgageBelt | 9th Jan 21, 12:20pm 1610148055

I always thought his posts are copy & paste from high level economic academic journals!

by iconoclast | 9th Jan 21, 12:29pm 1610148576

Stephen Audaxes Hulme

It should be noted that most of the increase in the NZX50 occurred on Thursday 7th January and assuming T3 settlement the transactions haven't hit the banks yet. Also it was noticed elsewhere that the driving force was the prices of all the Electricity companies going ballistic due to the revision of the MSCI Energy Index forcing Index following funds to buy Electricity companies in proportion to the new weightings within the Index

by Audaxes | 9th Jan 21, 1:07pm 1610150864

All stock market security purchases are settled after the fact. But nonetheless, the valuations remain valid.

by Hook | 9th Jan 21, 12:35pm 1610148952

Audaxes, you seem to forget that the NZX is skewed by a few high value index listed companies mainly traded by offshore Fund Managers. The NZX has been one of the better performers since Feb/March and the yields (real and quantifiable) have been relentlessly positive - far surpassing the tepid inflation figures we are currently seeing. If you are restricting your observations to Dividend yield then you're correct, but that it isn't the whole story

by Audaxes | 9th Jan 21, 12:48pm 1610149734

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. Link

by Hook | 9th Jan 21, 1:54pm 1610153692

I don't disagree with anything you say Audaxes except one thing - the short term (since march) return has certainly not been low. There is commentary around now that looking at previous metrics (PE, NTA etc) may well be a thing of the past. Valuations now are admittedly "out to lunch" but given there aren't many options for fund managers or institutions where does the money go? BTC??
I think the statement that low interest rates "justify" high valuations is putting the cart before the horse. They don't justify them - they cause them. Until the relentless flood of money is restricted I can't really see equities returning to being governed by fundamentals

by Audaxes | 9th Jan 21, 2:29pm 1610155763

Believe what you wish. But you are right speculation is rife and possibly asset bubbles are waiting to be pricked down the line. But without out doubt leveraged stock market investments, ultimately funded by easy bank credit are facilitating the process.

Investors Double Down on Stocks, Pushing Margin Debt to Record

by Hook | 9th Jan 21, 3:00pm 1610157656

Anyone who thinks using leveraged debt to invest in the market is a good idea deserves to lose their shirt - remember '87 in NZ?
Having said that there has been a rash of DIY investment platforms crop up recently - Sharesies, Hatch, RobinHood etc. These platforms aren't charities, they are farming the gullible. There's a lot of ill informed novices trying their luck.. will they be rewarded?.. hopefully. Will they be disappointed?.. most likely.

by KH | 9th Jan 21, 4:18pm 1610162298

Many of those newbie investors are very very small. Trying it out, learning a few things. Overall a good movement.

by Hook | 9th Jan 21, 5:01pm 1610164881

Individually they are. Collectively they add up. As I said.. those "instant trading" type platforms are farming the novices. The share market is not a place for the poorly educated, profit seeking, uneducated lambs. It's a blood sport - to make money someone has to lose money.

by Zachary Smith | 9th Jan 21, 6:10pm 1610169053

I've only been in a couple of months and have already made 8% on ETFs. I would think ETFs are a no brainer as they give you a good spread. A monkey could make money on the share market if he stays in long enough and doesn't try to pick individual shares.

by Hook | 9th Jan 21, 6:31pm 1610170278

ETFs work for the "set and forget" brigade, You're missing all the fun of direct investing. The monkey might miss out (and he will) but the trainer will reap the benefits. Direct investing is the way to go.. the gains are yours and the losses are yours. As an indicator Zachary, over the last couple of months the right shares have gone up by 30%+, leaving your monkey nibbling on peanuts

by Zachary Smith | 10th Jan 21, 3:31pm 1610245866

Yet all the experts say no to your strategy and back it up with statistics. Agree it could be fun, much like the casino.

by Hook | 10th Jan 21, 6:37pm 1610257068

Thing is Zach.. all the "experts" are still working for the man. If they were such experts wouldn't they be retired by now?? Remember all the predictions by the experts back in Feb/March?? all proven wrong. Expert/schmexpert - they are all crystalball gazers and tealeaf readers. I make my own decisions without the benefit of so called "experts" and for the last 10 yrs of investing have smoked them.
All the experts from the NZSF back in '07 ignored the NZX and went offshore - took a bath in '08/'09 and they're PAID to be experts

by Mark Hubbard 1965 | 9th Jan 21, 11:48am 1610146131

In US and NZ / AUS - the markets I watch bonds/treasuries in - there has been, for a while now, a lot of upward pressure on treasury yields, to the point where I'm wondering if Fed and RBNZ are able to control them (given rising inflation - and I mean CPI inflation - at last) for much longer. My annualised NZ/AUS treasury return is down to 5.5% and falling, Australasian corp bonds down to 6% and falling: very depressing.

My theory is to stay invested now because rising yields, and so much else in the economic world, will some stage (soon) finally collapse these stimulunatic share valuations (starting out of US), which should give a nice little last grasp bond rally, but I'm wondering how much control the CB's still have? Ie, timing.

Powell must be worried looking at the huge deficits Biden will run, and the ever bigger share/residential property bubble there from the added fiscal stimulus coming (in what is turning into the world's biggest command/communist economy given many Americans live now on money put directly into their accounts from the US state for doing nothing, and I don't see how they ween off this without large scale civil disorder until their whole economic system rolls over with debt (again, those rising yields).)

And of course, leave bonds but where to? Not shares at these lunatic valuations (at this point in time, worst risk/reward forever). I'm at my (own) allocation for commercial property, so I'm just building cash in a cash fund (where all maturing bank term deposits are going to).

I'll say it every post like this: it has to be the worst time for decades to be looking at upcoming retirement.

by Kate | 9th Jan 21, 11:59am 1610146740

Great insight, Mark. Thanks for sharing it.

by Audaxes | 9th Jan 21, 12:41pm 1610149282

...there has been, for a while now, a lot of upward pressure on treasury yields, to the point where I'm wondering if Fed and RBNZ are able to control them (given rising inflation - and I mean CPI inflation - at last) for much longer.

While inflation expectations are a necessary condition, they are, by themselves, nowhere close to sufficient. To start with, TIPS pays investors based on the CPI and the CPI over the last decade has been moved around by WTI alone rather than WTI plus anything else. If there was an inflationary recovery on the horizon, and investors believed it was a realistic possibility, then inflation expectations would imagine TIPS holders getting paid by more than supply factors in Cushing, OK.

Bouncing up and down by oil prices only proves the economic deficit; that there isn’t anything other than crude to provide that government-funded benefit. An inflationary period is one where real economy opportunities are widespread, never concentrated so narrowly. Sure, TIPS benefit from oil but the CPI would be accelerating for these many other factors.

What that would mean is rising nominal yields, too. Given where the yield curve is now, steepening right from the start.

And while the curve has become somewhat steeper, it’s only because of how things are going at the short end. The 2s10s part of the curve, for example, has decompressed to 82 bps at the start of 2021 – the steepest since October 2017.

Over the past two months, however, that steepening has been a product of the rate on the 2-year Treasury falling while that for the 10s has barely budged. Despite vaccine-aphoria being introduced into crude in a small way, therefore TIPS, the rest hasn’t gone along.

The TIPS rate along with a minimally higher 10-year is declared proof positive the Fed has been successful at its inflation engineering when there’s everything here (including oil, too) to contradict that assessment.

To begin with, the other part of TIPS no one ever talks about. Real yields. Because nominal Treasury rates haven’t moved all that much, the rise in oil prices, particularly the post-vaccine move, has had to come at the expense of so-called real rates. This changes the interpretation entirely.

Both the 5-year and 10-year real rates have fallen dramatically, staying down despite all these recent “positive” developments which are said to be economic game-changers. In fact, the real 10s yield is equal today to its lowest on record while the 5s are mere bps from their own.

What does that mean? No recovery, no inflation. Rather, TIPS are being moved higher by expectations for the CPI to be better, on average, because of higher oil prices alone. The economy itself, which is what would produce actual inflation – sustained, broad-based increases in all consumer prices not just one or a few commodities – is being priced simultaneously as if prospects for the intermediate and longer terms have changed very little.

In other words, a woeful economic situation which would be made worse (more miserable) by rising crude. Link

by Mark Hubbard 1965 | 9th Jan 21, 12:58pm 1610150335

No, it's not just what is happening at the short end. It's what's happening at the long end.

US10Yr up to 1.12% (a big rise off lows).

NZ10Yr up to 1.07%

And there is, especially in US, more and more evidence of CPI inflation, starting with rising food prices.

by Mark Hubbard 1965 | 9th Jan 21, 1:04pm 1610150665

Is it possible to post jpg files in here or similar? How?

by PocketAces | 9th Jan 21, 2:11pm 1610154711

There doesn't seem to be, even the simplest method, copy and paste, you can copy and paste text but not images. You can post a link to something containing an image

by Mark Hubbard 1965 | 9th Jan 21, 2:21pm 1610155308

Yes, seems to be. Pity. Be great to be able to post graphs and charts.

by gingerninja | 9th Jan 21, 2:56pm 1610157400

I've got really strong meme game and would abuse the image function.

by Audaxes | 9th Jan 21, 1:26pm 1610152011

Check out US real (Treasury Inflation Protected Securities - TIPS) yields here

Investigate the 10 year TIPS (linker) yield history here.
Click the 1Y tab at the top right hand corner of the page and chose to VIEW FULL CHART. The trend of increasingly negative real yields is on display for all to see. The 5Y tab serves to highlight reality.

by Mark Hubbard 1965 | 9th Jan 21, 2:45pm 1610156746

Thanks for that, but ...

I know the long term trend, historically. I realise there is an historically high level of debt absurdly now on negative rates (something like US-HarryPotter-$18 trillion): and it's been an inexorable descent on the US10yr for 80 years since Bretton Woods. That's not what I'm talking about. I'm talking about the immediate 'future': vis a vis an emerging trend. Since about the start of December my annualised treasury/bond returns - which I update and measure daily - are falling with increasing speed because there is a rise in long term yields and it's a trend. Because rates will rise. Cycles, no matter how long, will turn. *I'm wondering if that new data point is coming.* (I chiefly know what I know always from my pocket, as an investor.)

In EU and US there is increasing CPI inflation. It stands to reason as Fed stimulunacy weakens the USD they're importing inflation to start with. The Fed has never been as reckless they have become latterly: that must change the future environment, that may well break past trends.

That's what I'm wondering. Ie, I'm an investor: I want to know where I'm going to gain, or lose, money over the next week, the next month, and next year. I'm not too concerned with further out in financial markets as distorted as they have become where forecasting has become almost as pointless as it is impossible.

So this still doesn't answer my premise: will rising rates (and a host of other factors from the 'real world') finally pop this huge asset bubble, and will that, at least temporarily, give me a great little bond rally. Or ... not.

I don't think the past gives me a lead on that

... further issue. How do investors make money in an increasing interest rate environment? Valuations will be hit for all asset classes, particularly shares and property. There will be a very long lag before bank term deposit rates rise ... a return seems impossible short to medium term in that (other than high risk, shorting shares, etc).

by Andrewj | 9th Jan 21, 2:36pm 1610156171

Unemployment numbers look shocking in the States , will we be immune ?
https://alhambrapartners.com/2021/01/08/closing-the-books-on-2020-didnt…

Treasury bonds
https://www.youtube.com/watch?v=NGk52oVs0f8

by Mark Hubbard 1965 | 9th Jan 21, 2:42pm 1610156558

At this stage, US is in a far bigger mess than us. And it only gets worse for them economically and in terms of social cohesion: they will continue to fall into social unrest and when the Fed loses control, it will be the scariest event of the lifetimes of most reading this.

Will look at the Youtube: cheers.

by Fritz | 9th Jan 21, 2:44pm 1610156669

As long as we are covid-free I don't think we will be affected anything like the USA.
Hopefully we keep this more infectious variant out. I know a couple of cafe / restaurant owners who told me another level 3 lockdown would put them out of business. I imagine there are quite a few businesses like that.

by Mark Hubbard 1965 | 9th Jan 21, 3:01pm 1610157681

Andrewj: that Youtube right on target. What I was looking for; thanks for that.

Good argument for no rout ... not sure I'm on all fours with it. But a valid argument in its own right (and matches why I've remained in bonds still).

by Audaxes | 9th Jan 21, 4:53pm 1610164438

Keep an eye on US banks' asset position in government guaranteed securities.

by Audaxes | 9th Jan 21, 4:57pm 1610164642

As I said, real (inflation adjusted) interest rates are not really rising, both here and in the US, and in fact remain negative. Hence, to repeat:

Both the 5-year and 10-year real rates have fallen dramatically, staying down despite all these recent “positive” developments which are said to be economic game-changers. In fact, the real 10s yield is equal today to its lowest on record while the 5s are mere bps from their own.
What does that mean? No recovery, no inflation. Link

And please accept that I understand the DV01 costs of rising bond interest rates from such historically low levels is extremely expensive in percentage terms.

by Mark Hubbard 1965 | 9th Jan 21, 3:12pm 1610158364

Yes, real interest rates have fallen that's why I've taken (and will continue to do so) all maturing term deposits from banks.

And yes, those rising nominal interest rates from low levels do hurt. We're finally onto my point :)

My problem is, then, there is evidence nominal interest rates now continue on their current rises and CB's won't be able to stop that - there is also perhaps finally a risk premium being placed into rates which has been taken out with the destruction of price discovery previously.

If so, I'm best to move out of bonds, short term. If not, I stick around waiting for the share correction and the likely rally.

by Hook | 9th Jan 21, 5:33pm 1610166801

Hahahah.. REALLY??!! you actually still have cash in TDs and Bonds? Bonds atm barely cover UoM costs if at all. How long have you been waiting for the "correction"?? If you missed the Feb/March one you'll be waiting for a bit longer. SAF hope you're not a fund manager

by Mark Hubbard 1965 | 9th Jan 21, 8:30pm 1610177428

Don’t appreciate the big dick nonsense. I’m an investor. Do I have all my savings in TDS ... no. But at 4%+ it was quite appropriate... those TDS are coming out as they mature.

Forget the one up man ship: you just make me think you have no skin in the markets.

Deal woth my content please without the bullshit. Thank you.

by Mark Hubbard 1965 | 9th Jan 21, 8:32pm 1610177541

And up to now bonds and treasuries have been a very good investment. In fact the 10Yr has been a better return over last two decades than NZX.

by Hook | 10th Jan 21, 9:36am 1610224584

Hmmm... my equities have increased in value by 80% (not counting divys) over the last 7 yrs, I wasn't aware 10yr bonds had done that

by Mark Hubbard 1965 | 10th Jan 21, 11:51am 1610232694

Two decades. Also in US. In fact the best play for 80 years has been bonds.

But of course none of us have all our savings in just one asset class do we.

I’m very conservative coz I can’t afford to lose my capital, so I’m overweight in less risky low return assets. Which means these stimulunatic financial markets are a nightmare for me, but I have the right mix for me. I never tell someone else what they should or shouldn’t have, and I would certainly not attempt to make fun of them or try to make them look stupid for investments made that *suit them*, coz that’s pointless and it’s arrogant.

by frazz | 10th Jan 21, 5:28pm 1610252894

Hows your BTC going..oh thats right you are too clever for that.

by Hook | 10th Jan 21, 6:32pm 1610256736

Not at all frazz - I don't believe in it and don't trust it so I don't buy it. Simple really. It has no intrinsic worth and it's price is (for me) is impossible to justify

by Mark Hubbard 1965 | 10th Jan 21, 9:05pm 1610265927

Funnily enough I bought $4,500 of BT (chump change) on 26 October 2020 to see how BT worked: it's currently worth $12,035 :) Roughly 170% return for just over two months; 906% return annualised.

But yeah, it's all bullshit.

by Ahuhyeah | 10th Jan 21, 9:43pm 1610268198

When do you think the right time to sell and realise it will be?

by Mark Hubbard 1965 | 10th Jan 21, 9:51pm 1610268671

Holding for ten years then buying a Super yacht.

by Hook | 9th Jan 21, 3:50pm 1610160618

Audaxes can you by chance stop just doing the C&P mission from various academic publications.. they don't add much and they're mostly US centric. How about some personal opinions we can relate to??

by KH | 9th Jan 21, 4:31pm 1610163067

I don't understand them either Hook, but many will. After all it is interest.co
Keep it up Audaxes.

by Hook | 9th Jan 21, 5:11pm 1610165495

KH, the people who can understand Audaxes' C&P posts won't be reading anything on this site - they're well above that. Actual real world experiences posted by people who are at the coalface are far more informative for the average Joe here. Esoteric suppositions and academic postulations don't really add much.

by realterms | 9th Jan 21, 1:47pm 1610153276

That the US 10y yield is above the nz one is interesting in itself. I'd hazard that hasn't been the case very often.

No way to post images here so far as I know. Which is too bad.

by Fritz | 9th Jan 21, 2:18pm 1610155113

Any thoughts on built to rent investments? There's one advertised in the Herald today, theoretically sound like a good investment.

by treadlightly | 9th Jan 21, 3:59pm 1610161165

That sounds a scheme something like Blue Chip Investments which went broke with everyone loosing their money. There are plenty of sound NZX listed property companies and retirement village operators which have done very well.

by Hook | 9th Jan 21, 4:13pm 1610162005

When they start advertising in MSM you know it's a sign to stay well clear. If you don't know that already then stick with TDs

by Fritz | 9th Jan 21, 4:47pm 1610164036

Here's their website:

https://www.duvalpartners.com/

by treadlightly | 9th Jan 21, 5:03pm 1610165009

Proceed with great caution I would recommend. How liquid is the investment, can you get your money back out again if you need to?

by Hook | 9th Jan 21, 5:23pm 1610166186

Fritz I'm not sure if you're old enough to remember the '87 crash of equities. People who got burnt in that (if they had any money left) flocked to FinCo's. All ended in tears.(and Govt guarantees)
Looking at their offering, this is something I would recommend to someone I wanted to see go tits up - "have I got an opportunity for you!!" This is Amway in drag.

by Fritz | 9th Jan 21, 6:38pm 1610170701

Thanks Hook

by brisket | 9th Jan 21, 6:49pm 1610171366

My question would be, why do they need retail investors?
If it's such a great investment, and they have a good track record, surely they would a) have lotsa their own capital, and b) have banks throwing money at them?

by Theoracle | 9th Jan 21, 10:14pm 1610183676

I think banks just want to see pre sales to fund them. But yeah, good question, maybe they do need retail investors if banks won't fund them. I didn't pay too much attention when I heard them talk as if I'm going to be in property and rentals I can do way better getting 10, 15, 20% yield whatever I want to generate. Plus prefer to own land and be in control of the whole thing not hands off to some big company led by a slick dude with lots hotshot sales guys and marketing girls doing the big sell. Now that I recall it I remember thinking it seemed fishy for some reason.

Or maybe that's inbuilt investors paranoia kicking in.

by Dale Smith | 9th Jan 21, 10:06pm 1610183206

Yes, as the saying goes, 'for some people, the lesson learnt hardest is the lesson best learnt.'

I don't think this is you.

by Nzdan | 10th Jan 21, 1:12pm 1610237577

They can offer a guaranteed fixed 10% return on your investment? Make sure you read the legal disclaimer at the bottom of the website.

by KH | 9th Jan 21, 4:33pm 1610163208

You canbe screwed by crazy inbuilt "management fees"

by Theoracle | 9th Jan 21, 10:17pm 1610183863

Can I say a few words, I know a bit about this crowd and the build to rent concept. It is relatively new to NZ and obviously focused on residential tenants. I heard the Duval group crop up at some investment event I went to at which they were one of the speakers. If I'm right it's a UK dude behind it who built a massive portfolio in the UK only to lose it all. Then in a rags to riches tale built it all up again and has brought the concept to NZ. It is just apartments and townhouses, medium density development, sold principally to investors as a dual key investment. So basically you get two rental units for your spend hence a higher yield. Duval do all the management and maintenence sinking fund/ body Corp. They've been focusing on land in south Auckland near transport links. It's pretty bog standard investment, the units are new, modern, meet healthy homes and the rents are meant to be affordable. I guess it's capitalizing on people who can't save a deposit.

Anyway that like most of these things, and there's another crowd I'm familiar with in Chch are all about, like most investors, actually in it for speculative gain. So it doesn't really fit my investment terms but I guess lots of people love a hands off investment even if it's paying only about 6 or 7% compared to TDs.

Apartments... personally wouldn't touch them but know others who've done OK but caution heavily to know your market. Myself I ask... what are you buying, air space... no underlying land value. Personally I prefer to own land or land with houses. Anyway each to their own.

The Chch crowd are expanding throughout NZ and sell off market direct to investors thereby allowing buyers to avoid commissions and competition. The model is something like $675k buys you a duplex, again a dual key investment with 2 2x bed rental units each paying about $400-500/ wk or so. The developer buys cheap sections and manages to keep the build price right down by importing product in bulk and they make their margin on the build. They pay asking price for sections but look for 700sq m sections to do their 2x100sq m 2 bed and single garage houses on. It doesn't work on smaller sections they have to pay more money for. Again the longterm sell to "investors" is capital gain with tenants as cannon fodder to meet the holding costs for 5 years to avoid bright line. The Chch crowd at least do houses you own outright but still not my cup of tea personally.

So that's it really, pretty basic, low yield but the sell is that property is safe bricks and mortar and how can it not go up within 5 years. That's my understanding.

by Dale Smith | 10th Jan 21, 12:18pm 1610234308

It's not that new as it has been done in the late 90's, early 2000's via managed apartment complexes, and the reason you haven't heard about them lately is they didn't live up to their promises.

Already I hear that some of their off the plan sales valuations are more than what they are being valued on completion, so the wheels are already starting to fall.

Of course, the developer has the conditions about his assumptions in the small print.

There are a few developers that do real long term value for money developments, but others are just another form of spruiking.

by Kate | 10th Jan 21, 4:07pm 1610248076

Big announcement on change to 'One China' policy/acceptance from the outgoing Secretary of State - preparing to enable the defense of Taiwan?

https://www.state.gov/lifting-self-imposed-restrictions-on-the-u-s-taiw…

Possible reaction to this?

https://www.wsj.com/articles/chinas-new-rules-amp-up-pressure-on-u-s-bu…

by MortgageBelt | 10th Jan 21, 6:17pm 1610255851

Good to see the US improving their relations with Taiwan and ignoring Chinas pretence that Taiwan is part of the mainland country.
NZ should also be building more partnerships with Taiwan instead of NZ tertiary sector giving away IP to Chinese universities and giving them more credibility via joint programmes.

by Fritz | 10th Jan 21, 8:51pm 1610265080

Good. PRC won't like it, though.

by Kate | 10th Jan 21, 9:12pm 1610266330

And;

https://timesofindia.indiatimes.com/world/rest-of-world/us-to-integrate…

by Fritz | 10th Jan 21, 8:58pm 1610265503

I am fascinated to see what happens with Auckland rentals in the coming month. 5200 available on TradeMe. Many seem slow to let. Usually hyper demand in late January / early February but lack of international students...