90 seconds at 9 am with BNZ

90 seconds at 9 am with BNZ: Commodity prices fall on global growth worry; Silver slumps; Oil down; NZ$ at 79 USc; Fonterra share trading delay; Mobile rate cuts due

5th May 11, 9:01am by Bernard Hickey

Bernard Hickey details the key news overnight in 90 seconds at 9 am in association with Bank of New Zealand, including news that commodity prices fell across the board overnight on fears of a slowdown in global growth.

The price of West Texas Intermediate (WTI) oil fell below US$110/barrel and silver fell more than 5% to extend its biggest three day losing streak since 1983. Silver has dropped from almost US$50/oz late last week to under US$40/oz overnight.

Gold prices fell and US stocks fell around 0.5% on worries about slower than expected US service sector growth and weaker US jobs growth.

There are also worries about China's growth rate in the wake of yet more ominous comments from the People's Bank of China about moving to crack down on inflation.

These worries about growth and lower commodity prices dragged down the commodity currencies, including the Australian dollar and the New Zealand dollar. The kiwi fell to 79 USc.

Meanwhile, Korea has signed a Free Trade Agreement (FTA) with the European Union (EU). This is the second biggest free trade agreement ever signed. The biggest was the North American Free Trade Agreement (NAFTA) that includes America, Canada and Mexico.

Kore is New Zealand's 6th largest buyer of exports and New Zealand is currently negotiating its own FTA with Korea.

Meanwhile, back in New Zealand, Andrea Fox writes at Stuff that plans to pass legislation this year to allow trading of Fonterra share trading have been delayed until next year.

Elsewhere, the Commerce Commission is expected to announce the regulation of lower mobile phone termination rates, which in theory would mean lower mobile phone costs. See a preview from Chris Keall here at NBR.

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36 Comments

by Andrewj | 5th May 11, 9:08am 1304543280

http://www.telegraph.co.uk/finance/economics/8492078/How-the-Fed-triggered-the-Arab-Spring-uprisings-in-two-easy-graphs.html#dsq-content

the life-cycle of bureaucracy

http://www.oftwominds.com/blog.html

our turn soon?

http://www.telegraph.co.uk/finance/financialcrisis/8493240/Portugal-agrees-asset-sale-in-return-for-78bn-bail-out.html

jonlivesey

You write this as though it's good news, but what typically happens when anyone, a country, a company or an individual, sells assets in a crisis?

Typically, the crisis has already affected the price of the assets in a negative way, so they fetch fire-sale prices. So yes, someone will pick up TAP, I expect, and they will get a terrific bargain, while Portugal will lose its national airline.

by Christov | 5th May 11, 9:31am 1304544690

AndrewJ......good link and in keeping with what I have alluded to for a coupla years...Fed flushes the toilet paper as Wally likes to call it ....down every targeted oriface...seeking a unilateral ground zero...Start point .."Alpha"...hot bed for inflation..U.S.re-enters the game holding the notes and maybe more than a little control of the game again.

There is(I believe) a converse phase to the commodity surge...that is where I placed my bets...let's hope I got it right.

by rp | 5th May 11, 10:20am 1304547646

Good point Chistov. The end of QEII may see funds shift out of commodities. They aren't needed any more as an inflation shelter. Where the money will go next could by more normalised i.e. into assets that yield income / capital growth. The big thing I see however with the end of QE is can America fund its deficits without monetising them? I don't think they can. If not, they will need to resort to QE again, or make dramatic cuts in spending. I hope they do they right thing and stop the QE.

by Anarkist | 5th May 11, 10:51am 1304549499

Christov,

We don't have inflation Christov, what we have is a short-run increase in the cost of living brought on speculative bets on the commodities markets. The data shows that in spite of the low interest rates brought on by Quanity Easing and dollar recycling by merchantalist nations like China and Japan, the level of investment is continuing on a continuing downward trend, whilst borrowing on margin for speculative bets on the capital markets have exploded.

Total borrowing at commercial banks has continued its steady descent downward. There has been a net decline in total borrowing since QE2 began...But what QE2 has done is spark a mania in speculation. And according to the NYSE’s margin data there is near record borrowing occurring. According to the March data margin debt is quickly approaching its all-time highs. As I noted last week, this surge in borrowing is not a sign that QE is “working”, but rather, a sign that it is only fueling the very same sort of imbalances and unproductive economic activity that got us into this crisis in the first place. """"

http://pragcap.com/the-speculative-boom-in-borrowing-continues

Inflation is the permanent increase in the general price level due to genuine capacity constraints in a mature economy which is experiencing a rise in general prospertiy. Adam Smith explains this in Chapter 8 of Wealth of Nations.

"It is not the actual greatness of national wealth, but its continual increase, which occasions a rise in the wages of labour. It is not, accordingly, in the richest countries, but in the most thriving, or in those which are growing rich the fastest, that the wages of labour are highest.

ihttp://geolib.com/smith.adam/won1-08.html

A glance at economic fundamentals in no way shows this. Instead Mervyn King predicts a degree of wage squeeze in Britain not seen since the 1920s.

"unpleasant though it is, the Monetary Policy Committee neither can, nor should try to, prevent the squeeze in living standards, half of which is coming in the form of higher prices and half in earnings rising at a rate lower than normal. .........one way or another, the squeeze in living standards is the inevitable price to pay for the financial crisis and subsequent rebalancing of the world and UK economies. ""

I think the rise in fuel costs will have a deflationary effect on the economy as it forces people to cut back on discretionary spending. Its only the runaway train underpinning economic prospects in the world economy at the moment, but it inherently unstable and I forsee a forthcoming trainwrech that'll bring down the world economy in the not too distant future.

by rp | 5th May 11, 10:56am 1304549819

what do you think will happen now with QE11 stopping Anarkist?

by OMG | 5th May 11, 11:31am 1304551862

QE will be ongoing according to Saxena Asian Perspective on the Global Economy with Puru Saxena Puru and Jim discuss the chances of a correction in Chinese real estate, subsidized gasoline in China, and the Chinese selling of US Treasury bonds. Puru also looks at the prospects of precious metals and energy stocks.

http://www.financialsense.com/financial-sense-newshour/guest-expert/2011/05/03/puru-saxena/asian-perspective-on-the-global-economy

by Anarkist | 5th May 11, 12:11pm 1304554280

I think people, especially policy makers overstate the effiacy of Quantitive Easing. All it does is stem the tide of de-leveraging in the capital markets due to the credit squeeze in 2008. Its nothing more than an accounting operation that changes the composition of the balance sheet at the Federal Reserve in favour of shorter term securities with a lower interest rate in hope that the move will entice investors to buy securities with a higher risk premium such as corporate bonds etc. No new "money" is created.

“Now, what these reserves are is essentially deposits that commercial banks hold with the Fed, so sometimes you hear the Fed is printing money, that’s not really happening, the amount of cash in circulation is not changing. What’s happening is that banks are holding more and more reserves with the Fed.” Ben Bernanke

For a far better explanation check out the link below.

http://pragcap.com/mechanics-qe-transaction

by Matt S | 5th May 11, 12:32pm 1304555547

So, you are a defender of Benny and the Inkjets, and you call yourself Anarkist .. interesting.

by Anarkist | 5th May 11, 5:38pm 1304573884

Matt,

Defend Benny and the Inkjets from what? Attacks on a carictured strawman conception of what the Federal Reserve is doing? No I just let the numbers speak for themselves and dispell and illusions as to how the system functions. My views of the matter have little weight so why voice them?

Newsflash we no longer live in a Gold Standard world and its got precious little to do with Lefties. If you wanna blame anyone, blame Milton Friedman. He opened Pandora's Box.

by Gummy Bear Hero | 5th May 11, 12:36pm 1304555787

Excellent website , thanks for that , Anarkist ........ Gummie's off to do some reading . Cheers !

by rp | 5th May 11, 12:48pm 1304556534

...thanks for a thoughtful response Anarkist. I don't agree with you however on a few aspects. QE doesn't affect the amount of cash, I agree with you there. This is M1 of the money supply. But QE does increase M3, this is the amount of credit, which can be and is used to buy things. It does increase the total money supply, and will be affecting prices. You are right that if banks have more credit from the Federal Reserve (at a zero or near zero interest rate) they seek to invest somewhere to get a margin on it (so there is shifting to other high yeilding securities)...however the key bit is what happens from there...by banks doing this they provide money to others in the economy (whose higher yeidling instruments they have bought).

by Anarkist | 5th May 11, 1:56pm 1304560564

"But QE does increase M3, this is the amount of credit, which can be and is used to buy things."

Sure it can, but the numbers tell a different story. Like I keep saying, QE is merely stemming the tide of deleveraging in the Capital Markets and according to the stats its failing even at that.

Although the USA stopped issuing M3 we can still measure M3 through various independent sources. Hyperinflationists are often quick to point out Shadow Stats when anyone cites the CPI. Ironically, according to their data the M3 money supply is still shrinking at an annualized rate:

by rp | 5th May 11, 2:17pm 1304561825

..hmmm...I think you may be right Anarkist. The offsett of deleveraging is higher than QE...so total M3 is lower....nice explanation and link, thanks!

by steven | 5th May 11, 2:37pm 1304563029

Depedns on what you means by prices....retail? or specualtive? M3 is only of interest if its being spent in retail....if ppl are not borrorwing then the money sits in banks, and core inflation is indeed very low and enaemic, so affecting prices should be seen, when in fact there is no sign of it in the core inflation measurement.

http://www.telegraph.co.uk/finance/economics/7769126/US-money-supply-pl…

Now it allows the likes of GS to gamble widely, sure, hence the stock market is where it is....a great dead cat bounce....

regards

by Christov | 5th May 11, 3:01pm 1304564519

Perhaps that could be the case Steven with the proviso that it is everybodys ..dead cat bouncing....and the road is paved with enough elastomeric material...and obsticals cleared.....the cat may just keep on bouncing dead or no.....

The inevitable consequence of finite resource will surley halt the pavers and clearers ..the rest of us will need remain in the chase cars untill the dead cats stops and rapid deceleration ensues.

by rp | 5th May 11, 3:20pm 1304565626

Hey Christov...there's another brilliant paper in that link from Anarkist.

http://pragcap.com/the-case-for-human-ingenuity

Gives a superb counter argument to the the finite resources theory for commonidty prices rises.

And yes Steven, I think it could be a brutal deadcat bounce. May take a year or two to play out though.

by Christov | 5th May 11, 3:31pm 1304566272

THANKS.. RP..getting to it tonight.

by Christov | 5th May 11, 12:28pm 1304555311

Anarkist...thank you for an informative and well presented response.....just to clarify I am not ...was not a supporter of QE....as insane an idea as it was ..it had to be to and end game...I don't buy the stall n hope theory.

I do believe the Americans desire to control the wider global economy is greater than addressing fully the issues they have in front of them....and are gearing to that end.

I had said to Wally QE would end in the middle of the year thereabouts and that Bernake would hold......that is now the case.

My money..(no pun intended) says no QE3 or extension of QE2 post June's end.

Let us see shall we

P.S. I did not suggest N.Z. was a target market for ground zero policy...just a byproduct....gasoline will be our undoing...the proverbial rock and hard place.

by Anarkist | 5th May 11, 1:39pm 1304559566

"Anarkist...thank you for an informative and well presented response.....just to clarify I am not ...was not a supporter of QE....as insane an idea as it was ..it had to be to and end game..."

My pleasure Christov. I hope that my attempts to clarify what appears to be a general misconception as to the nature and ramifications of the Quantity Easing policy of the United States does not imply that I approve of it. In itself it distorts the decision making of market participants, but far worse is the horrendous performance of banking authorities in terms of informing the public about the issue. I leave it to others more qualified to explain things better than I can when necessary..

"Now, if you're looking at a zero nominal return on money-market instruments, as well as expected inflation over time, it's natural to start hoarding commodities. See, if you expect your dollars to buy fewer goods and services in the future, and you're not earning interest to make up for it, you'd prefer to stockpile goods right now. "

http://hussmanfunds.com/wmc/wmc110228.htm

There are so many misconceptions propogated by avowed "experts" that it would take a lifelife to dispel them. The problem is ideology is too often interfering with rational debate to the extent that it often results in a complete distortion of reality. A contempory case is that of government deficits. People have the misconception that its bond issues that fund government borrowings, when they're really just a means to settle a debt that the government has already incurred. Similar to how we write a cheque to a local merchant and later settle it in cash.

“But here is the essential fact I want to emphasize and have you think about today: The Fed could not monetize the debt if the debt were not being created by Congress in the first place….The Fed does not create government debt; Congress does.”

Richard Fisher of the Dallas Fed

http://pragcap.com/pomo-flip-matter

There is no intrinsic limit to government borrowing when they have have an independant currency and Central Bank, at least in countries with a seperation between primary and secondary markets as in the United States and the United Kingdom. The only constraint is ideological. A government can default only when the private sector fails first as in Russia in the 1990s and Argentina in the early 2000s.

There are several ways of trying to achieve this but many OECD countries appoint a group of highly qualified financial firms to play a role as specialist intermediaries in the government securities markets between the authorities on the one hand and the market on the other... In return for a set of obligations, such as making continuous bid and offer prices in marketable government securities or submitting reasonable bids in the auctions, these firms receive a set of privileges in the market.In return for a set of obligations, such as making continuous bid and offer prices in marketable government securities or submitting reasonable bids in the auctions, these firms receive a set of privileges in the market. ...

http://www.bankofengland.co.uk/education/ccbs/handbooks/pdf/ccbshb06.pdf

Under those terms, bond auctions in government securities can't fail. It stands to reason why the United States and the United Kingdom has no trouble funding its debt obligations whilst their fiscal position is essentially the same as Greece.

by Christov | 5th May 11, 2:09pm 1304561349

Anarkist.....Thanks again for one of the most informative pieces and links i've had the pleasure to read in a while...

appreciate the effort and will take the time to digest link info. Ta.

by andyh | 5th May 11, 9:45am 1304545500

The US non-manufacturing (service) sector expansion slowed dramatically last month with a reading of 52.8 versus an expected expansion to 57.9. Given that it covers 80% or so of US output........

New unemployment claims have started edging up in the past month as well.

Oh look what the oil price is doing to the US economy, hoocoodanode?

Another couple of months of bad readings and Bernanke will be talking about launching QE3.

by David Chaston | 5th May 11, 10:14am 1304547240

New car sales in NZ in April were down 7% on the same month a year ago (both include Easter) and were at the lowest level since Dec-09, according to data out today from NZTA.

http://www.interest.co.nz/charts/industry/new-vehicles-sold

and used imports were down 12% y-on-y and at their lowest level since Oct-09.

by Roger Witherspoon | 5th May 11, 12:51pm 1304556709

Excellent news. My Subaru is 20 years old soon.

As a country we need our exports to exceed our imports, month after month after month.

The alternative is poverty.

by Gummy Bear Hero | 5th May 11, 10:22am 1304547772

Chinese social networking website Renren has had a spectacular debut on Wall Street . The $US 14 shares popped immediately to first trade at $US 19.50 . And later rose to $U 22 , a 57 % rise , before ending the day's trading session at $US 18 , a tidy 29 % gain on the day .

.......... Renren ( RENN ticker symbol ) initially had a market cap of $US 5.7 billion , but gained $ 1.7 billion on it's IPO day . Sales for 6 months have been annualised to give a figure of $US 76.5 million , placing shares on an 80 times sales metric . The company is not profitable . But the CEO promises they will be so , soon .

This price / sales ratio has been extrapolated to Facebook , to give it a potential market capitalisation of $US 70 billion . ( greater than Boeing )

by Vanderlei Luxemburgo | 5th May 11, 11:37am 1304552276

Great to see high interest in people buying and selling something at a profit without adding any value whatsoever. Really gives me a sense of hope.

by Christov | 5th May 11, 12:14pm 1304554471

It Is....Vanderlei...entirely possible to hedge in a speculative market ...and remain a productive citizen in other commercial ventures relative to N.Z. .

If i choose to not place retirement funds with Banks on term deposits for obvious reasons then it is my call what I do with them....and nothing of yours is risked in that.

by Vanderlei Luxemburgo | 5th May 11, 12:34pm 1304555677

i agree that nothing of mine is risked in that transaction. i also agree that it is your right to carry on in such a manner.

my point is though, that buying and selling something without adding any value to it is symptomatic of the current global situation where otherwise bright people are devoting themselves to pointless activities such as buying into IPO's. Finance markets are supposed to price risk and allocate capital, but instead we have otherwise useful people patting themselves on the back for being the first one to buy a share that will rapidly appreciate in price (not value).

by Christov | 5th May 11, 2:34pm 1304562857

Vanderlei......You point is well intended and well taken....but perhaps the options presented to me locally send me ...to the table...into the game... if you please.

That does not mean it is a preferred option...just that I, like yourself (maybe) ,and many others have had the value of their real worth by means of security undermined during this global fiasco.....and hedge options present goalposts that are at least visible while not without risk.

and to your point...."my point is though, that buying and selling something without adding any value to it is symptomatic of the current global situation "

You have no argument from me there...that I can find justifiable..save to say I'm playing catchup and have run out of options.

by Vanderlei Luxemburgo | 5th May 11, 2:51pm 1304563908

yeah its interesting shristov that most of us on this site are more or less sympatico about the big issues even if we like to argue from different angles. i was really interested in the policy proposals that came out last night after steven made some proposals in the ACT stream....

its like the debate over whether mr westpac is overpaid. of course he is, but he'd be an egg to turn it down. for me it seems like we need a paradigm shift. for years universities have been teaching that profit is most important and that the richest guy in the room is the best guy in the room.

i guess these things change slowly - much like housing market collapses or societal collapses - but i'd like to think we're at last heading into a time of real change...maybe something like that spirit level book will provide enough momentum to cause a cultural shift so we can start placing value on something other than super yacht sales figues (although as i've said elsewhere at least superyacht makers are actually adding value and producing something.)

by Christov | 5th May 11, 3:05pm 1304564736

Big Amen to that Vanderlei.

by powerdownkiwi | 5th May 11, 3:40pm 1304566820

Christov - actually, dear boy, I think you're wrong.

At this point, it is entirely logical to link wealth to purchasables, meaning at the end of the day, resources.

If you intend to 'make money from money', then you expect to purchase with the 'money gained, right? Same as John Key, alle same no productivity done.

But

You didn't produce the processed resource, so whoever did, must get less. You are both, after all, bidding in the same auction.

I think this is where folk miss it - they think money can make money - and of course, it only can on the upside of the curve. On average, it can't on the downside.

by Christov | 5th May 11, 5:04pm 1304571853

Appreciate your thoughts on it PDK....i'll chew it over.

by Andrewj | 5th May 11, 12:41pm 1304556083

Ok let me just play with the words a bit

NZ is not Portugal, but it could become so For the NZ, there could scarcely be a more salutary warning of the dangers of runaway public debt than the sight of Portugal joining Greece and Ireland in the prison of economic enslavement to the faceless bureaucrats of Europe and International Monetary Fund.

http://www.telegraph.co.uk/finance/comment/jeremy-warner/8493209/UK-is-…

by Christov | 5th May 11, 2:32pm 1304562770

hey ...Ostrich....long time no see...hope all is good with you and yours.

by Christov | 5th May 11, 3:33pm 1304566400

in position with heavy duty umbrella Ostrich...good luck to you and cheers

by Anarkist | 6th May 11, 12:33pm 1304641995

As I was back in 2007 when I was watching the crisis unfold, I'm convinced that the economic crisis was a premeditated takedown of the world economy which sought to reshape the political and social superstructure of Europe and the United States in favour of a cabal of financial elites, just like the Energy Crisis and the following Paul Volcker initiatied recession in 1981. Adam Smith discussed how it is far easier for the masters (employers) to combine, because of their smaller number in order to collude against the workers. Its now far easier for them to do so in our hyperconnected world.

The masters, being fewer in number, can combine much more easily ...We rarely hear, it has been said, of the combinations of masters, though frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject. Masters are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate. To violate this combination is everywhere a most unpopular action, and a sort of reproach to a master among his neighbours and equals. We seldom, indeed, hear of this combination, because it is the usual, and one may say, the natural state of things, which nobody ever hears of. Masters, too, sometimes enter into particular combinations to sink the wages of labour even below this rate. These are always conducted with the utmost silence and secrecy, till the moment of execution, and when the workmen yield, as they sometimes do, without resistance, though severely felt by them, they are never heard of by other people

http://geolib.com/smith.adam/won1-08.html

If you think I'm a tin-foil hat wearing conspiracy theorist, check out the links below.

A secretive group of Wall Street hedge fund bosses are said to be behind a plot to cash in on the decline of the euro.

Representatives of George Soros's investment business were among an all-star line up of Wall Street investors at an 'ideas dinner' at a private townhouse in Manhattan, according to reports.

http://www.dailymail.co.uk/news/worldnews/article-1253791/Is-man-broke-Bank-England-George-Soros-centre-hedge-funds-betting-crisis-hit-euro.html#ixzz0gqqdowL8

At this point he makes an extraordinary claim: 'I am 100 per cent sure that the Americans were behind the increase in the price of oil. The oil companies were in in real trouble at that time, they had borrowed a lot of money and they needed a high oil price to save them.'

He says he was convinced of this by the attitude of the Shah of Iran, who in one crucial day in 1974 moved from the Saudi view, that a hike would be dangerous to Opec because it would alienate the US, to advocating higher prices.

'King Faisal sent me to the Shah of Iran, who said: "Why are you against the increase in the price of oil? That is what they want? Ask Henry Kissinger - he is the one who wants a higher price".'

http://www.guardian.co.uk/business/2001/jan/14/globalrecession.oilandpetrol

" A controlled disintegration in the world economy is a legitimate object for the 1980s. "

Paul Volcker in 1978. 'The Political Economy of the Dollar'

http://www.newyorkfed.org/research/quarterly_review/1978v3/v3n4article1.pdf

Arguably, it also saved key corporate pillars of the beleaguered U.S. arms industry. Indeed, several U.S. officials, including the ex-ambassador to Saudi Arabia, James E. Akins, recently argued that Kissinger acquiesced in the Shah-led oil price hikes beginning in 1974 to provide Iran with the finances to help out ailing Northrup, McDonnell Douglas, General Dynamics, Boeing, Grumman and Litton Industries.

http://multinationalmonitor.org/hyper/issues/1980/12/cavanagh.html